Like many other investment markets, the foreign exchange market has its unique characteristics and guidelines. As such, ordinary traders can make common errors when dealing with this form of trading.
There is a concept in the foreign exchange market called “Market Momentum”, which traders can commit one of these errors. To read more about this way visit the website.
What Is “Market momentum”?
Forex trading is all about capitalizing on opportunities. You buy currencies where the price is low, and you sell them when the price reaches a higher level to gain some profit.
Now let’s say that prices are moving steadily upwards, but suddenly there was an economic report or data released which affected the course of prices very quickly, making it move downwards.
This rapid shift in prices would mean that you have missed out on buying at a low price and that your short position is no longer profitable because of the new downward trend.
This example shows what market momentum means: it highlights how certain events can affect prices significantly, thus changing their trend immediately.
So how do traders benefit from this? Well, they benefit by knowing that the market is not just going to do what it’s doing already. A slow and steady trend can suddenly change direction because of a great event, so it’s good to put stop-loss orders in place or get out of your position before such events so you can avoid losses.
How To Use “Market Momentum”
To use Market momentum properly, traders need information about the market and its events.
Once an impactful report has been released or a significant piece of news announced, you will know how the market reacts to it and whether these changes mean that prices will continue their upward or downward trend. Then you can profit from this knowledge by taking appropriate actions.
The purpose of trading in forex (and in any other market) is usually to take advantage of opportunities and avoid being exploited by others who have been taking advantage of you all along.
In forex trading, there are times where speculative buying pushes up prices while short term volatility makes it possible to benefit from the price changes. Market momentum is the general name given to this upsurge in prices, which corrects itself after a while.
For example, during an uptrending market, some ongoing news about the economy is likely to have positive implications for that particular currency or currency.
Naturally, this “good news” will lead more people to buy that particular currency, leading to an increase in demand due to higher purchases, thus creating upward pressure on the currency’s price.
How To Use It?
Knowing when market momentum is at its peak can be immensely helpful in making consistent profits while trading in forex.
As with all types of investing and trading strategies, it would make perfect sense if you tried out our strategy to test its effectiveness.
The use of market momentum in forex should be done by taking advantage of the volatility during the uptrends and downtrends, resulting in the minimal loss while having profits at hand.
How To Tell It’s At Its Peak?
One undeniable indication that it is high time to get out would be when you see prices rise exponentially without any touchbacks or even one minor correction along the way.
However, if you face a situation where there is an actual correction (i.e., quick drop) even once after multiple upward spikes, do not panic buy into this position. It could mean that other traders expect the same trend to continue, thus creating buying pressure due to their expectations.
This means that you may end up buying at a price far higher than the actual value due to such high demand (especially if there is increased volatility as well).
How To Profit From It?
There are several ways to profit from market momentum, and traders should take note of these.
Use stop-loss orders during an uptrend.
If you want to cut down on the losses you stand to incur, then putting a stop-loss will be your best weapon in minimizing loss.
When prices rise dramatically and show no signs of slowing down, it makes sense to put a buy order with a stop-loss just above the highest point reached by previous spikes just so that you can get out of this position for a minimal loss should the trend reverse.
Use limit orders during a downtrend.
We’ve all been there to try catching a falling knife and end up getting cut instead – that’s because we don’t know how much lower prices will go! If you want to play it safe, then whenever you’re planning on going short, make sure you set your stop-loss order at a level below where the highest point of the previous decline was.
This way, if the market reverses direction and goes higher again, your losses will be limited.