Trade with the trend is the most commonly told mantra by the experienced traders. But this difficult task makes trading a little tricky affair. First of all you will have to identify the trend early enough. If you have practiced enough to spot the trend early, the viability of the trend needs to be tested. You should make sure that it is not a fake trend by judging its strength. This is where momentum indicator comes into play. There are plenty of them to help you. Most commonly used indicators are CCI, RSI, and Stochastic.

A Simplest Indicator

Intended to use for commodities, now it is used with many financial instruments to spot the trend, its strength and a possible turnaround. There are many versions with many trading systems. The range is from +200 to -200. When above 100, uptrend is held and you can buy. You sell when it goes below -100. Zones beyond positive and negative 100 are considered overbought and oversold conditions. Extremely overbought and oversold zones sit beyond 200. In such cases you are supposed to dump your trades. When this momentum indicator crosses the zero line, appropriate trades like long or short should be taken and should be carried till the extremely overbought or oversold zones.

Relative Strength Index

This momentum indicator was developed by Welles Wilder and it takes into account the close of a candle over a specific period of time. By default the period is 14. Play with RSI is little different from CCI. Up or down trend is confirmed when it crosses the levels beyond 50. Overbough and oversold levels are above 70 and below 30 respectively. As opposed to CCI, when levels are broken above 70 or below 30 instead of taking trade, you wait. Once entered into these zones, price tends to stay there for a long time. So if you want to play with RSI, you sell when RSI comes below 70 from above and buy when it goes above 30 from below. A level of 50 is used by many traders. It is also used with trend lines. When this line follows the RSI, there is convergence. If it diverges from the RSI trend, it is a signal to a possible reversal. If you can use RSI with trend lines, you have an edge over many traders.

Use Trend Line of Stochastic for Edge

Developed by George Lane, this momentum indicator assumes that the price closes looks to close near its high or low when in uptrend or downtrend respectively. It ranges from 1 to 100 and consists of fast and slow line. Zones below 20 and above 80 are critical. Zone above 80 is overbought while that below 20 is oversold. When a zone is broken, it is interpreted as reversal or correction. This indicator can be employed differently. The simplest way is to sell when the fast line cuts the slow line from above and buy when it crosses the slow line from below. Next play is similar to RSI. You wait for the indicator to come below overbought zone of 80 and then sell and wait for stochastic indicator to come above oversold zone of 20 and buy. You can also use the momentum indicator to find a divergence between the currency price and the stochastic indicator. Divergence is construed as correction indicating you an appropriate trade.

Momentum indicator is a handy tool if used with some knowledge. You will have to spot the trend well before the masses so that you can make money with lesser risks. The weapons of indicators give you a competitive advantage over others.

Author's Bio: 

Learn how to trade along with the trend safely through looking into HotForex review. You can also have a look at the various strategies that you can use when it comes to identifying the trend early enough such as day trading strategies