Momentum Indicator

Momentum indicator is based on the theory that a market in motion tends to stay in motion. Meaning that if a market has finally gained up enough steam to head in a specific direction then it will tend to remain moving in that direction. The theory is simple of course, but the practice would be much harder if it were not for one of the most beautiful trading tools called the stochastic indicator. Stochastic indicator is a momentum indicator which warns of strength or weakness in advance, making it leading indicator to confirm trading signals in conjunction with support and resistance.

The logic Of the stochastic is based on the assumption, that when a market is rising, it will tend to close near the highs of the session - and when a market falls, it tends to close near the lows. The stochastic developed by Dr. George Lane. It is plotted as two lines %K and %D on a scale of 1 to 100 scales. These two lines have differing sensitivities to market fluctuations. %K line is more sensitive than %D. %D line is a moving average of %K. %D line gives the trading signals. It’s actually similar to the way a moving average is plotted. %K is a fast moving average and %D is a slow moving average.

Momentum is very much taken into consideration by technical traders, many of whom believe that momentum can be as accurate an indicator of a currency pair as the actual price itself. Many different indicators are designed to help a Forex trader detect patterns of momentum.

For Forex traders, there are several ways to measure momentum using technical analysis. A common use of the stochastic is to use it as an overbought / oversold indicator. The 80% value is normally used as an overbought signal, while the 20% is used as an oversold signal. The signals are even more reliable if a forex trader waits until the %K, and %D lines turn upward, below 5% before buying - and in conversely, above 95% before selling.

Don’t worry if the above confuses you - you don’t need to understand the logic. When you look at stochastic on a chart, all you're looking for is the visual signals - not the calculation behind them. Do some research and practice before trading with stochastics.