The Pros and Cons of Trading Forex Momentum Indicators

Lets get straight to it, the markets are open and there's work to be done! Technical indicators can be grossly divided into two categories, the oscillators and the forex momentum indicators. The biggest difference? Oscillators are leading indicators, whilst forex momentum indicators lag. A little like the hare and the tortoise. And with them, come very similar problems!

This article will focus on Forex Momentum indicators, the pro's and the con's and how you can overcome the problems associated with lagging, leading indicators!

Lets Start with Forex Momentum

Forex momentum is the rate of change in price and are based on the trendlines on your price chart. Is is an indicator of volume in the forex market and whether the currency is overbought or oversold. High momentum indicates overbuying and low momentum indicates the opposite, overselling.

Forex momentum can be used to indicated a buying or selling opportunity. If momentum is low, only to rapidly shoot back up towards the zero line you have a buy signal. And the opposite applies for a sell signal.

The Pros & Cons of a Lagging Indicator

One of the best descriptions of a lagging indicators I've come across compared them to computer virus software. A leading indicator warns that you are about to download has a computer virus. A lagging indicator tells you after you've got the virus. I'll leave it up to you which one you want!

Why bother with lagging indicators then? Leading indicators are subject to fakeouts. You are essentially taking an educated decision on on the market is going to move so it is important to factor into your money management system that relying on leading indicators can be risky.

Forex momentum on the other hand puts you in a position where you already have evidence of the way the market is moving (ie. looking at the trend) so you are less likely to suffer a fakeout.

Missing out on Money

The most frustrating aspect of working with lagging indicators is both the late entry (and exit) on your trades. Since you miss the start of the trend (you are waiting for you indicators to let you know) you miss out on those early profits. That doesn't sound too bad does it? Actually it is bad as the biggest profits are generally made at the beginning of a trend! Ouch!