forex online day trading system

the ultimate forex trading system

When it comes to technical analysis of the price action on Forex charts, one of the most important indicators you can have in your arsenal is a good momentum indicator.  In fact there are several indicators for momentum that you can use.

We'll look at all of them and why the Stochastic indicator is considered by many to be the best.

MACD, or Moving Average Convergence/Divergence, is a good indicator of price momentum. This indicator uses two moving averages and an activating period.

Usually, when you see a cross of the moving averages, a change in momentum, or trend, has, or is about to, occur. Sometimes, however, there is a cross and yet price action moves sideways instead of in the opposite direction of the previous trend.

RSI, or Relative Strength Indicator, is another good indicator of momentum. With the RSI, what you are looking for initially is a break across the 50% line.  When the RSI crosses above 50, you are looking at an upward trend. The opposite is true when it crosses below 50.

Also, overbought and oversold readings tell of a probable trend reversal.  However, this tends to be somewhat of a lagging indicator and can leave you with only half of the trend left to follow.

Stochastics are varied in their configuration. You can set them in many ways depending on the charting package you use. These indicators are considered one of the best momentum indicators because they get you the signal first. Whereas MACD and RSI tend to follow,  Stochastics seem to be almost simultaneous with the trend change.

Strong trends usually follow the highest/lowest spike of the Stochastic in the opposite direction of the current price trend.  The Stochastic tends to be more susceptible to "noise" from price action, however, so be aware of this.

These three indicators are all good methods for determining momentum of price action in Forex.  However, while the Stochastic indicator is favored, one of the more common practices among traders is to use Stochastics, MACDs, and RSIs together and look for total confirmation of trends on all three.

 It depends on your personal style as to how you use the indicators, but regardless, you'll probably at least want the Stochastic in your arsenal.

Read More Forex Articles