However, looking at the RSI indicator suggests that bullish momentum is actually fading from the market. (Read more about Forex Divergence trading) Price is travelling higher, putting in successive new highs suggesting that a bullish trend is likely to continue. In the above chart you can see a fantastic example of bearish divergence. This demonstrates the typical reaction that traders are anticipating when the indicator moves into extreme territory looking to buy when the momentum is oversold and sell when momentum is overbought First you can see where the indicator has moved down to the 30 threshold suggesting momentum is overstretched to the downside, before reversing higher, and then shortly after as price moves higher you can see that the indicator moves into overbought territory suggesting that price is overstretched to the topside, before price reverses lower. In the above chart you can see we have t wo examples of overstretched RSI momentum. The typical way that traders use these indicators can be split into two categories: The first is where traders look to fade price based on exhausted momentum when the indicator moves into extreme territory, the second is where traders look to identify divergence between the indicator and price, suggesting potential for a reversal. The default settings on the indicator are a 14 day lookback period and a 70 limit indicating overbought and a 30 limit indicating oversold. The RSI indicator gives readings based on a calculation which measures the average gain of price divided by the average loss of price over a specified time. The Stochastics indicator, which are among the most popular forex technical indicators. However, in this article we are going to look at two other momentum indicators The further below 100 the indicator goes the more oversold momentum is considered to be. The higher above 100 the indicator moves the more overbought momentum is considered to be. The indicator oscillates around a centreline of 100 which might or might not be shown automatically. Essentially, the indicator looks at price in relation to where price has been over a specified lookback period with a view to identifying price as either overbought or oversold. Many new traders will automatically turn to the Momentum indicator which is a default indicator on MT4 platforms. Momentum indicators are typically bound oscillators which means their readings fluctuate between an upper and a lower limit. Momentum indicators measure swings in price to and essentially look to determine whether price is overbought, where bullish momentum is overstretched, or oversold, where bearish momentum is overstretched. Among the vast array of technical indicators used by traders, momentum indicators continue to prove themselves a firm favourite and form the cornerstone of many classic trading strategies.įirstly, momentum refers to the strength of price with bearish momentum being the strength of a downward move in price and bullish momentum being the strength of an upward move in price.

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