Trade with the trend is the most commonly told mantra by the experienced traders. But this difficult task makes trading a little tricky affair. You will have to catch the trend before most traders. Once you identify the trend, you will need to find its credibility. You can avoid taking trade with the fake trend by looking at 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. There are many versions with many trading systems. It moves from +200 to -200. When above 100, uptrend is held and you can buy. You sell when it goes below -100. Zones beyond positive and negative 100 are considered overbought and oversold conditions. Extremely overbought and oversold zones sit beyond 200. In such cases you are supposed to dump your trades. You buy or sell depending on the momentum indicator cutting the zero line and hold it till the 200 level.
Identify the Strength with RSI
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. Play with RSI is little different from CCI. Up or down trend is confirmed when it crosses the levels beyond 50. 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. A level of 50 is used by many traders. Trend line can also be incorporated with this. When this line follows the RSI, there is convergence. If it diverges from the RSI trend, it is a signal to a possible reversal. 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
This momentum indicator is developed by George Lane and works on the assumption that the price likes to close near the high or low. It value varies from 1 to 100 and has two lines- fast and slow lines. Levels 20 and 80 are important. Zone above 80 is overbought while that below 20 is oversold. Crossing a zone is considered a reversal or just a correction. There are many ways you can use this indicator. The easiest is to sell or buy when the fast line crosses the slow line from above and below respectively. Following method has resemblance with RSI. You wait for the indicator to come below overbought zone of 80 and then sell and wait for stochastic indicator to come above oversold zone of 20 and buy. You can also use the momentum indicator to find a divergence between the currency price and the stochastic indicator. Divergence is construed as correction indicating you an appropriate trade.
Momentum indicator is a handy tool if used with some knowledge. You will have to spot the trend well before the masses so that you can make money with lesser risks. The weapons of indicators give you a competitive advantage over others.
Learn precisely how to trade along with the trend in a safe manner simply by checking out Hot Forex review. You can also have a look at the various strategies that you can use in regards to figuring out the trend early enough for instance day trading strategies .