Momentum trading strategies, in the domain of the forex market, utilize technical analysis instruments. They involve good understanding of various technical indicators that help gauge the momentum of the forex market and align your trading strategies accordingly. Also, momentum trading is a short-term trading strategy and requires high standards of discipline. To strike a perfect chord between the psychological pressure and the disciplinary standards, you require both experience and expertise to deconstruct the forex market.
Entry Points for Momentum Trading in Forex
Momentum trading in the forex market uses technical indicators to determine potential trends. According to a theory propounded by Alexander Elder, momentum trading comprises of two essential components – market inertia and market momentum. The first component considers upward and downward market trends through an exponential moving average. Market momentum is analyzed through a ‘moving average convergence divergence oscillator. This determines the value of change between bullish and bearish behavior.
To make a perfect entry in the trade, both inertia and momentum graphs should move in the same direction, either upward or downward. When both the indicators move upward, the market is dominated by bullish behavior. However, if the indicators are moving downward, a bearish market is predicted.
Forex Momentum Trading: Exit Points
To exit forex momentum trading on profit taking, you should consider the movement of ‘moving average convergence divergence’. According to textbook knowledge, when this indicator changes its direction, the trader should close the position. This scheme will work nicely for most situations. According to the experts, the exit decision should come instantly in momentum trading as the order appears to reverse.
Forex momentum trading comprises a mix of psychological quotients governing the market and mathematical analysis of the same. It is an effective method for short-term trading; however, to take long positions, a trader should consider technical indicators that compute long-term trends.
Momentum for Stocks
For one, also stock trader can focus on momentum trading strategy. It looks to exploit market volatility by taking momentary situations in stocks going up and selling them when they give indications of going down. The financial backer then, at that point moves the cash-flow to new positions. For this situation, the market unpredictability resembles waves in the sea, and an energy financial backer is cruising up the peak of one, just to leap to the following wave before the main wave crashes down once more.