Momentum trading is a particularly popular approach to forex. Momentum trading is a strategy that aims to capitalize on the continuance of existing trends in the market.
The momentum investor believes in spotting large price movements.
These large and regular movements come from trading psychology. Traders simply react, or don’t react, to important events in the news or economic world.
The result is that they move in a group in a single direction, and this has a lot of money moving in the same way – it pushes the market in a given direction, and creates momentum.
Momentum strategy works best in ranging markets. A certain duration is required in order to establish a trend.
There are a large number of momentum indicators to choose from: For example, the Awesome Oscillator or the Intraday Momentum Index are both well-known. All of these work on essentially the same principles.
Various oscillators are calculated by different formulas, but they are all based on the relationship of the current price to previous prices for a specified period of time. The theory is that a change in momentum tends to lead to a change in price.
Oscillators are used to help determine whether a price movement will become a trend: Will it be sustained, or has it finished, and is it likely to reverse?
There are different types of momentum values to interpret. When momentum values are positive and rising, one can assume that prices are rising, indicating that buyers are supporting a rise in price over the trend.
When values are slowing, the trend is moving to a close. When values are falling, prices are falling, and sellers are moving together to support a drop in prices.