Forex Trading And Momentum Divergence

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Forex Trading And Momentum Divergence Powered By Docstoc
					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.

				
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