Forex Trading And Momentum Divergence

An ailment that many traders suffer from when they are in a live trading environment is called "analysis paralysis," where you are trying to take in too much information in deciding when to trade and in which direction, and you either overload your charts with indicators that you don't fully understand or you try to read every single piece of news on your news feed and try to determine what it means. In all areas of life people will encounter problems when they try to overcomplicate things, and so the solution to this for your trading is to find a trading strategy that is simple and logical, and will not give you a headache or make you feel paralyzed and unable to act. One such strategy is called "momentum divergence," and all you need is one indicator on your price chart.

The first step is to pick the currency pair and the time frame that you are comfortable trading with. Some people like to use short-term charts and hold open positions for 5 minutes to 2 hours, while other like to hold their trades open for 2 hours to 2 days or longer. Your personal preference will determine what the time frame on your chart will be. After you are settled on a specific chart to find signals from, you will want to add a momentum indicator called a "stochastic oscillator" which will be displayed below the active price data and should come standard with every charting package out there nowadays. This is a purely technical analysis-based strategy, so you will not be needing your newsfeed or economic calendar for this.

A momentum indicator measures the rate at which prices are moving now relative to the rate at which prices have been moving in the recent past, and the result is an indicator which tells you whether current market conditions are overbought or oversold. The reason this can be such an important thing to know is because the foreign exchange market is not exchange based; in an exchange-based market such as futures or commodities you can have access to price volume data, but there is no way to compile this data on the forex market so the closest thing is a momentum indicator. Typically the momentum indicator will move in sync with the price data itself, so the line drawn by the actual chart and the line on the oscillator should match up closely.

The reason this strategy is called "momentum divergence" is because you can identify trading signals by finding those times when the price data does not correspond with the oscillator graph. The term "divergence" refers to those times when prices move opposite of momentum, which means that prices continue to rise even though momentum has started to fall or momentum is rising and the price is still falling or moving sideways. As you might understand by now, since a momentum indicator is the next-best-thing to price volume information, when there is a change in momentum but no change in price it can tell you beforehand whether the exchange rate is likely to go up or down.

To use this strategy you will want to follow your chart and look for one of two setups: Either the price is continuing to rise but momentum is falling, or the price continues to fall but momentum is rising. Your entry signal will be when you have identified a setup where you feel thst there is a large move in the price momentum that has not yet been translated into actual price movement, and your exit signal will be when you see the indicator exit overbought or oversold territory.

The oscillator itself conveys a value of 0-100, where over 80 usually indicates overbought and below 20 usually indicates oversold. If you decided to buy the currency pair because you saw momentum on the rise but no change in the price level, you would want to set a reasonable stop-loss and then hold the position until you see it cross into overbought territory and sustain the upward movement, and then exit when the oscillator crosses back down over the 80 mark. If you decided to sell the currency pair, then you would follow the same process and wait for the signal where you see the momentum moving lower but no change in the price. Then you would hold until the oscillator goes below 20 into oversold territory to continue the price movement and then exit when it crosses back above the 20 mark.