Tuesday, December 04, 2007

Online FOREX Trading – If You Want To Win Understand Price Momentum

If you want to win at online FOREX Trading you need to understand the importance of price momentum in putting the odds on your side.

If you don’t understand price momentum you will lose.

Let’s look at why it is so important and how to put the odds in your favor.

A common error

Most traders like to trade in the following way in online FOREX trading.

They like to buy into support and sell into resistance but they don’t pay attention to price momentum.

They hope resistance and support hold as they enter their positions and this is a recipe for disaster.

Why?

Well keep in mind this well known phrase.

A trend moving in one direction is more likely to continue than reverse.

So if prices are moving strongly to test support and resistance and price momentum is strong these levels can and do give way.

WAIT FOR CONFIRMATION!

A better way to trade is to use support and resistance and wait for them to hold before trading against these levels.

The odds will be vastly increased, as you will be looking for resistance and support to hold before taking your position and seeing price momentum weaken as the levels are tested.

This increases the odds of success for you and allows you to trade with price momentum on your side.

You won’t get in at such a good level as if you predicted correctly without using momentum, but as you can’t predict where price will go anyway always:

Wait for confirmation of a momentum change and your trade is more likely to be successful.

What indicators should I use?

By far and away the best indicator to use is the stochastic indicator.

We don’t have time to explain it in detail here, so simply read our articles.

The best set up you can get is:

For the stochastic lines to reverse and cross with either bullish or bearish divergence as the price tests support or resistance.

This will show price momentum changing and falling as the test is made, allowing you to enter a trade with momentum on your side, increasing your chances of success.

Another useful indicator to use is:

The Relative Strength Index RSI devised by Wells Wilder.

Again, if you don’t know how it works read our other articles.

Watch it to turn down as support or resistance are tested.

Get the odds on your side

The above two indicators are great for helping you judge price momentum and decide if support or resistance are going to hold.

Support and resistance levels give way frequently, but get price momentum on your side before trading and you will dramatically increase your chances of success.

Remember:

To increase your chances of success trade with price momentum on your side, the trend is your friend as the old saying goes – Act on price confirmation and don’t PREDICT.

By : Sacha Tarkovsky - http://www.net-planet.org/