Have you ever heard traders talk about momentum? Momentum is when the market moves in one direction with significant force, enough to move prices to where a profit can be made. So, wouldn’t it be nice as a trader to know when the market is going to move with force and in which direction. If we did we would not need many sophisticated tools, indicators and other trading paraphernalia.
There are three kinds of momentum
As a long time student of RSI, the Relative Strength Index, I have identified what I think can be categorized as 3 kinds of momentum. Two can be identified on RSI charts by anyone, the third is more difficult but we can identify areas where the possibility and probability of its occurrence is at higher levels.
Momentum Type 1
There are 4 RSI Trading Signals. Two of these signals are divergences. Many traders today use divergence to confirm that a reversal is taking place on a price chart however, a trader who knows and understands where divergences tend to occur, knows that they appear when a trend has lost some of its steam and prices begin to retrace. Divergences then are a signal to the trader in many cases that a trend is slowing down.
Momentum Type 2
The RSI Trading Signals that indicate Momentum Type 2 are reversals. There are two of these as well. This momentum type indicates that Momentum Type 1 is running out of steam and that prices are ready to make an attempt at continuing the trend it was previously on. Therefore, reversals are a signal of Momentum Type 2 which is used to look for entries to re-enter the trend.
Momentum Type 3
This is momentum that traders try to capture when they look for chart patterns or price patterns. It would be like cornering a wild bull, all the time knowing that when it decides to become un-cornered it will do so with some level of force. Experienced cowhands are pretty good at figuring out when this happens. Forex traders with some experience and added statistical data also have a pretty good idea also. This is the momentum that creates profit. But to do that you have to be in position and Momentum Type 1 and 2 help determine that.
Michael Marcus, a well-known Forex trader once said in an interview that one of his most successful trading methods was to enter a market when he thought the momentum would be with him. If it was not, he exited the trade immediately, before his stop was taken out or with an extremely tight stop.
The 4 RSI Trading Signals can put you in position to take advantage of Momentum Type 3. To do that you will need to learn about the 4 signals and how they work. Once you do you can begin to pick your spots for Momentum Type 3 that lead to substantial profits.