These indicators are usually called momentum oscillators because the indicator line or histogram "oscillates" (or swings) up and down between or around specific values – much like a sine wave.
Various oscillators are calculated by different formulas, but they are all based on the relationship of the current price to previous prices for a specified period of time. Therefore, oscillators are lagging indicators (backward looking) and have no predictive use. Price confirmation must occur before entering a trade.
Momentum indicators work best in ranging markets. They tend to give false signals during breakouts and trends – especially when using hourly or shorter timeframe charts. Experiment with the parameters for various oscillators – remember, lower parameter numbers and shorter chart timeframes will give quick responses to price changes BUT with many false signals.
Momentum oscillators measure the rate of change of price movements (or the speed of price changes). Because FX volume cannot be easily measured, momentum indicators serve a valuable purpose in that they reflect market interest – as does volume in other instruments.
The theory is that a change in momentum tends to lead to a change in price. These indicators signal if;
• values are positive and rising – means prices are rising, indicating buyers are active,
• values are slowing – price rises are slowing, buyers are leaving the market,
• values are falling – prices are falling and sellers are active.
Reportedly the 3 main momentum indicators used by currency traders are;
1. The Relative Strength Index (RSI) oscillator
2. The Stochastic oscillator
3. The Moving Average Convergence Divergence (MACD) oscillator
Note: Momentum indicators are not useful in trending markets.
|Momentum Indicators||Useful in Forex?|
|Accumulation Swing Index||Yes|
|Centre Gravity Oscillator||Yes|
|Chande Momentum Oscillator||Yes|
|Commodity Channel Index||Yes|
|DiNapoli Detrend, DPO||Yes|
|DiNapoli Preferred Stochastics||No|
|Dynamic Momentum Index||Yes|
|Intraday Momentum Index||Yes|
|Linear Regression Slope||Yes|
|Random Walk Index||No|
|Rate of Change (ROC)||No|
|Relative Momentum Index||No|
|Relative Strength Index||Yes|
|Relative Vigor Index||No|
|Schaff Trend Cycle||Yes|
|Schaff Trend Momentum||No|
|Schaff Trend Cycle||Yes|
|Schaff Long Term Momentum||No|
|Stochastic Momentum Index||No|
|Stochastic Oscillator Fast||Yes|
|Stochastic Oscillator Slow||Yes|
|Stochastic Oscillator Full||Yes|
|Williams' Accumulation/ Distribution||Yes|
There are many factors that affect exchange rates of currencies. However some are more important in currency trading than others. These are; Interest and Inflation rates, Trade balance, Currency market speculation, Foreign investment and Central bank market intervention. Learn how to use these factors in your forex tra ...