To achieve success at gold trading, it’s important to follow the most effective rules and indicators. The momentum rule is the best example. By understanding what it is and the way to use it, you’ll have a simpler time creating profitable trades.
The Zero Line
To understand the momentum rule, it’s important to know what the zero line is and how to use it. It represents the point at which the current price is the same as it was certain number of days ago. The zero line plays a vital role in the momentum rule. It dictates that you should buy once the momentum indicator crosses above the zero line and sell once it dips below it. When the momentum indicator rises higher than the zero line, it’s a decent time to buy because the price is trending upward. When the momentum indicator drops below the zero line, you should sell because the price is trending downward.
The concept of momentum is relatively easy to understand. Divergence is where many novice traders are thrown off. With momentum, an upward trending line reflects the speed of a price change. When looking at a chart, remember that the price can go up while the momentum drops. This concept is known as divergence. It occurs when momentum moves in the opposite direction of the price trend.
Imagine that the price of gold reaches a new high once a week for three weeks in a row. After that, no more new highs are created and it moves in the opposite direction and then flattens out. It crosses the buy/sell line immediately the next day. This is a perfect sign to buy or sell because you are near the peak of its price movement. Momentum typically peaks before the price does, which produces a divergence between the movement of the price and the movement of the momentum. This is a sure sign to buy or sell right away.
The Confirmation Rule
Momentum is usually used alone to detect buy and sell signals but it can also be used as an indicator of confirmation. The confirmation rule says that both indicators need to agree before a trade is made. It’s a wise rule for a few reasons. It reduces the total number of trades and it increases the odds of making profitable trades.
Many successful gold traders have transformed their gold trading strategies by incorporating the momentum rule.
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