Price ROC

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Introduction

Leaning to trade in the direction of trend is one of the first things novice traders learn about. The second thing that they learn is that’s easier said than done. The problem is most novices simply do not have a defined method or set of tools to trade with the trend. Anybody who has traded before most likely knows the feeling of buying at the top and selling at the bottom. Not exactly a viable long term trading strategy. With that being said it is easy to understand why so many traders spend so much energy searching for the holy grail of trading indicators.

Technically focused traders primarily use chart patterns, moving averages and technical indicators to aid them in their trading decisions. Chart patterns are used by traders to forecast future price direction and price objectives, unfortunately chart patterns don’t tell us when trends are about to reverse or when they begin to weaken.

Many traders use moving averages with chart patterns to improve their trading decisions. Moving averages are lagging indicators and are helpful in identifying and confirming the direction of the current trend. Like chart patterns, moving averages are not helpful alerting us when the current trend is about to reverse or is beginning to weaken.

To overcome some of the limitations of chart analysis and moving averages, traders can use technical indicators such as oscillators to identify when trends are weakening or about to change direction by studying subtle changes in price data. Technical indicators help traders eliminate some of the subjectivity that is required in chart analysis and allow them to create trading rules and systems.

The RSI and the Momentum Indicator (also called Price Rate Of Change (ROC)) are two of the most popular indicators used by traders today. These indicators are primarily used to identify overbought/oversold extremes levels, divergences and confirm trend changes.

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Momentum

Most technical indicators are based on the fundamental belief that volume precedes price. Momentum is a key concept that traders must master if they want to effectively understand most technical indicators. Momentum is defined as the rate of the rise or fall in price. Momentum simply measures the speed or velocity of price changes. An easy way to understand this is to visualise that momentum compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions. Most important thing to understand is that momentum is a leading indicator of a change in direction of price i.e. changes in momentum will precede changes in price.

Calculation

M = V – Vx

Where V is the latest price, Vx is the closing price n days ago.

Traders can track the direction of the trend by monitoring a momentum indicator. In an uptrend the indicator is positive and negative while in a downtrend. The strength of a trend is identified by how high or how low the indicator is. The momentum calculates data in absolute changes, and measures the strength of the current trend is measured by how high or low indicator reaches from different bases.

Indicator Interpretation

When momentum is positive prices are rising and momentum is negative when prices are falling. This translates into a positive momentum indicator that will increase long as prices keep rising and a negative momentum indicator that continues to decrease as long as prices keep falling. There is no upward boundary on the Momentum indicator. The Momentum indicator is most commonly used to identify overbought/oversold extremes, indicator trend line breaks, and Centre-line crosses.

Overbought/Oversold Extremes

By watching for extreme price levels traders can avoid buying at tops and selling at bottoms. The best way to use the momentum indicator is too for opportunities to trade in the direction of a prevailing trend by initiating a position on a pullback or retracement.

Centre-line crosses

This trading method is quite simple. Long trades are entered when Momentum line crosses its centre-line from below. Short trades are entered when Momentum crosses its centre-line from above. This is a trend-following approach to using this indicator as the direction of the trend is signalled as momentum is positive or negative.

Trend-Line Break

Another way of trading this indicator is the Trend-Line break on indicator line. In this method, the traders can utilize trendlines in the Momentum indicator and enter trades on a break of the trend line. This is a contra-trend strategy as the trend on the price chart would still be intact. By trading break of a trend line on the Momentum indicator, traders can spot weakening trends that may not show up on the price chart at all.

Conclusion

RSI and the momentum indicator are versatile momentum indicators that can be used by traders in a number of ways. In simplest use, indicators can stop traders from buying at tops and selling at lows. Momentum indicators can help traders’ time entries to trade in the direction of the trend on pullback opportunities. Positive and negative divergence can help traders see weakening trends that may not appear in price charts. The momentum and RSI index can help novice traders take some of the mystery out of why some trends begin or end.