Have you ever heard traders talk about momentum? Momentum is when the market moves in one direction with meaningful force, enough to move prices to where a profit can be made. So, wouldn’t it be nice as a trader to know when the market is going to move with force and in which direction. If we did we would not need many complex tools, indicators and other trading paraphernalia.
There are three kinds of momentum
As a long time student of RSI, the Relative Strength Index, I have identified what I think can be categorized as 3 kinds of momentum. Two can be identified on RSI charts by anyone, the third is more difficult but we can clarify areas where the possibility and probability of its occurrence is at higher levels.
Momentum kind 1
There are 4 RSI Trading Signals. Two of these signals are divergences. Many traders today use divergence to confirm that a reversal is taking place on a price chart however, a trader who knows and understands where divergences tend to occur, knows that they appear when a trend has lost some of its steam and prices begin to retrace. Divergences then are a signal to the trader in many situations that a trend is slowing down.
Momentum kind 2
The RSI Trading Signals that indicate Momentum kind 2 are reversals. There are two of these in addition. This momentum kind indicates that Momentum kind 1 is running out of steam and that prices are ready to make an attempt at continuing the trend it was before on. consequently, reversals are a signal of Momentum kind 2 which is used to look for entries to re-go into the trend.
Momentum kind 3
This is momentum that traders try to capture when they look for chart patterns or price patterns. It would be like cornering a wild bull, all the time knowing that when it decides to become un-cornered it will do so with some level of force. Experienced cowhands are pretty good at figuring out when this happens. Forex traders with some experience and additional statistical data also have a pretty good idea also. This is the momentum that creates profit. But to do that you have to be in position and Momentum kind 1 and 2 help determine that.
Michael Marcus, a well-known Forex trader once said in an interview that one of his most successful trading methods was to go into a market when he thought the momentum would be with him. If it was not, he exited the trade closest, before his stop was taken out or with an extremely tight stop.
The 4 RSI Trading Signals can put you in position to take advantage of Momentum kind 3. To do that you will need to learn about the 4 signals and how they work. Once you do you can begin to pick your spots for Momentum kind 3 that rule to substantial profits.