subject: Get To Improve Your Trading Activities Throuh Momentum Indicators [print this page] There is lot more to trading than just price reflected on the charts. Momentum is also an important aspect of trading. Trader has to take into account momentum while making trading decisions because price shows you a incomplete picture. Momentum gives a clearer picture. Inferior trade set ups can be avoided if momentum is also looked into.
Significance of Momentum Indicators
It is very easy to identify the major trend by naked eyes. Minor trends are sometimes present in a major trend. One has to study the charts carefully to see such trends. You can identify minor trends clearly if you use momentum indicators.
Let me explain the importance of momentum of the price. Say you are watching a car going past you. The driver in the car has decreased the speed of the car. As an outsider, you will not feel the decrease in speed. Unlike you, driver in the car will feel the decrease in speed. Price on the charts will only tell you that car is going somewhere. But the momentum indicators will tell you the speed with which it is travelling.
Good Trades Run with Momentum
What is the significance of the momentum? You will typically be in a trade from minutes to few days. You don't want to be in a trade if the strength of the trend is waned. You should always trade with stronger trends with stronger momentum. Momentum indicators will show you the momentum of the trend. Let me warn you before proceeding. They should never be used alone to make trading decisions. Likewise, price should not be used alone. You will trade profitably if you use either of them together. Commonly used momentum indicators are RSI, Stochastic, CCI and William's %R. You can use momentum indicators differently and get better trading results.
Divergence between Price and Indicator
The most popular way is to use it for divergence. Divergence occur when the price and momentum move in opposite directions. It is a strong signal of trend reversal. Trend doesn't stop in a day. It continues to trend even though the underlying momentum is fading. Price moves up but the momentum indicator shows the downtrend. This implies that the reversal of a trend is round the corner. Then you should look to trade against the trend.
Look for Crossing of Two Signals
Crossover is another favourite play of many traders. Traders look for two signals to cross which gives a trading signal. In case of MACD, a buy trade can be initiated if MACD cuts the signal line from below and goes above it. Similarly if MACD line crosses the signal line from above and goes below it, sell signal is generated.
Overbought and Oversold Conditions
Momentum indicators can also be used with overbought and oversold levels. RSI and Stochastic are often used with these levels. Such indicators are used to make better entries and exits.
Momentum indicators help you to determine the continuation as well as the reversal of the trend. It should always be used with other technical analysis tools such as price action, volume etc. A high probability set up is the one which turn in your direction immediately. If you master the techniques to use momentum indicators with price action, it is one of the most effective combination of trading.
by: Ownen Moore
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