Throughout the plethora technical indicators that are used by many traders, momentum indicators are still proving to stand strong as a classic trading strategy. So, let’s dive in and start with what momentum trading even means. When you're referring to momentum in Forex, it means the strength of price with bearish momentum being the strength of a downward move in price and bullish momentum being the strength of an upward move in price.
Momentum indicators measure the swings in price to determine whether or not the price is being overbought bearish momentum) or oversold (bullish momentum.) Typically, the indicator looks at the price in relation to where price has been over a specified look-back period with a visual identifying price to be either overbought or oversold. Let’s talk about two very common and very popular momentum indicators you can use to your advantage in order to be profitable.
One is the RSI indicator (relative strength index) which gives traders information based on calculations that measure the average gain of price, then divided by the average loss of price over a period of time. The typical way traders use this indicator is to tell two things: whether the price has faded due to slow momentum, or they can see a divergence between price and indicator, which suggests a possible reversal.
The Stochastic indicator is described as a slightly more advanced indicator with added functions that traders have been raving about for a long time. This indicator measures the closing price against a range over a specific period of time. The goal is to identify if the price is overbought or oversold. Really, the two indicators are so similar and just helping you to look for a specific move in price. Shawn Lucas, the head trader at The Apiary Fund is always supporting traders to use as many indicators as possible because really they are tools added to your tool belt to tweak your strategy, and improve your chances of being profitable and successful in the Forex market. Shawn Lucas gives many opportunities to new traders especially by being so involved with The Apiary Fund’s coaching and trading sessions. It was when I was watching a trading video that I came across the RSI indicator and the Stochastic indicator and decided to try and use them as a part of my trading strategy.
After reading this, I hope you are better able to understand how effective momentum indicators can be in helping you spot trading opportunities and take advantage of them.