Trade with the trend is the most commonly told mantra by the experienced traders. But this difficult task makes trading a little tricky affair. First of all you will have to identify the trend early enough. Once you identify the trend, you will need to find its credibility. You should make sure that it is not a fake trend by judging its strength. Momentum indicator helps you achieve just that. Many such tools are available to perform that task. Most commonly used indicators are CCI, RSI, and Stochastic.
Commodity Channel Index
Intended to use for commodities, now it is used with many financial instruments to spot the trend, its strength and a possible turnaround. It has many variations each with its own trading rules. It moves from +200 to -200. When above 100, uptrend is held and you can buy. You sell when it goes below -100. Levels on either side of 100 are considered overbought and oversold. The zones beyond 200 are considered extremely overbought or oversold. In such cases you are supposed to dump your trades. When this momentum indicator crosses the zero line, appropriate trades like long or short should be taken and should be carried till the extremely overbought or oversold zones.
Relative Strength Index
This momentum indicator was developed by Welles Wilder and it takes into account the close of a candle over a specific period of time. A typical period is 14. You can use RSI differently than CCI. Zones beyond 50 are considered as a confirmation of a trend up or down. Zone beyond 70 is considered overbought while that below 30 is considered oversold. As opposed to CCI, when levels are broken above 70 or below 30 instead of taking trade, you wait. Price spends lot of time in the overbought and oversold conditions. So if you want to play with RSI, you sell when RSI comes below 70 from above and buy when it goes above 30 from below. Some forex traders use the level of 50 instead of 70 and 30. Trend line can also be incorporated with this. When it is in accordance with the trend of RSI, then current trend is valid. If there is a divergence between RSI and trend line, there is a possibility of reversal of a trend. Understanding how to use RSI trend lines is a competitive advantage because you come to know about it much earlier than with just RSI.
Use Trend Line of Stochastic for Edge
Developed by George Lane, this momentum indicator assumes that the price closes looks to close near its high or low when in uptrend or downtrend respectively. It ranges from 1 to 100 and consists of fast and slow line. Levels 20 and 80 are important. They are called overbought and oversold respectively. Crossing a zone is considered a reversal or just a correction. There are many ways you can use this indicator. The simplest way is to sell when the fast line cuts the slow line from above and buy when it crosses the slow line from below. Following method has resemblance with RSI. Sell when the indicator comes below overbought zone and buy when it goes above oversold zone of 20. The last method is to use this momentum indicator for a divergence between the price of currency and the indicator. The divergence implies a correction so you can take appropriate trades.
If used intelligently, momentum indicator can improve your success rate in trading. Making money requires getting the edge with early identification of a trend or its reversal. The weapons of indicators give you a competitive advantage over others.
Understand precisely how to trade with the trend safely through checking out Hot Forex review. You can also take a look at the different techniques that you can use in regards to figuring out the trend ahead of time for instance day trading strategy .
