Understanding Forex Momentum Oscillators
In forex, omentum oscillators play a big role in identifying price trends. During trading the market obviously oscillates, or increases and decreases in value. As the market oscillates there will be times when it is gaining momentum. Hence the birth of momentum oscillators. Understanding momentum oscillators is the key to your profit when trading Forex because it gives you an idea of how much strength (or momentum) the current trend has.
A momentum oscillator will measure the strength in the increase or decrease of a price instead of just tracking the actual price level. As the price of a currency pair increases, it gains momentum. As the price of the currency pair stops rising, its momentum slows tremendously or it stops all together.
When you look at price action in Forex you will quickly identify some trends. At times you will see short spikes in the price of a currency and then you will see it return back to its original position. These short-term spikes are the result of some traders making trades based on their emotions, gut feelings or acting on behalf of “black box” trading systems. The price will temporarily spike as a result of these trades. Then the currency will return back to where it was before the spike.
A momentum oscillator is used to identify when this spikes occur. Your computer can identify these spikes. Your goal as a Forex trader is to determine if these spikes represent that the market is over bought (hence traders over-reacting on emotions or trading with black box systems). This is accomplished by comparing momentum to price. When these two are in synch the price is increasing. Once the momentum slows down in its rate of increase but the price continues to increase then you know you are at a moment right before the price adjusts back to its original condition. With this impending change, you want to sell before the price declines.
Understanding momentum oscillators is the key to your profit when dealing in currencies, but isn’t the only key! Remember to use some of the other types of technical analysis available.