We are going to review core market principles. The main one is that momentum precedes price. In this sense, a momentum indicator strategy is more like a trend following strategy. For a simple yet effective trend following method, we recommend reviewing The Trend Following Trading Strategy. Before diving into the best momentum trading strategies, let's define what momentum indicator trading strategies are:.
The law states that where an object in motion tends to stay in motion until an external force is applied to it. Like in the law of physics, a market in motion tends to stay in motion rather than reverse. This is the reason why a momentum indicator strategy is so powerful. Also, read about Fading the momentum in Forex Trading. Essentially trends tend to continue and we can use momentum to determine when to buy and when to sell. This is because instruments with positive momentum tend to have positive returns in the near future.
And vice-versa for those with negative momentum. This is why we have found that momentum is typically the best indicator for swing trading.
Best Momentum Trading Strategy for Quick Profits
There are various explanations for why price momentum occurs. Each bias has its own name and psychological explanation behind it. The simplest explanation would be that rising prices attract buyers and falling prices attracts sellers. Our best momentum trading strategy is based on this simple explanation. Anywhere between a few minutes and up to a few days.
Basically, the best momentum trading strategy runs until the momentum drys out. Before we move forward, we must define what technical indicator we need.
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This will help us select the best momentum trading strategy and how to use it:. There are a variety of different momentum indicators. The best forex momentum indicator will help us identify profitable day trading opportunities. The best forex momentum indicator is named after legendary trader Larry Williams who invented it. Larry Williams used the best forex momentum indicator to great success. He won millions of dollars in profits. A reading in the vicinity of is an indication that the instrument is oversold. You'll learn how to make profits from using the best forex momentum indicator.
We also have training on how to use currency strength for trading success. Our team at Trading Strategy Guides believes that smart trading is the way to build the best momentum trading strategy. Also read the hidden secrets of moving average. Step 1: Define the Trend. The definition of an uptrend is pretty much standard. In an uptrend, we look for a series of higher highs followed by a series of higher lows.
Two HH followed by at least another two HL is enough to define an uptrend. A higher high is simply a swing high point that is higher than the previous swing high. While a higher low is simply a swing low that is higher than the previous swing low. All momentum traders know that the trend is our friend.
But without momentum behind the trend, we might actually not have any trend. Price will then consolidate and often move into a box formation. When this box breaks out the momentum trader will look to trade in the direction of the momentum and the breakout. An example chart below shows how this works.
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Price moved higher before pausing and moving into a box. It then broke out higher and continued on with the momentum. One of the most popular indicators to find momentum trades is the moving average.
The reason the moving average is so popular is because it can show you when a trend is forming and also when strong momentum is building. This can be done when using two moving averages together. Most traders want to get into the market at the best price. This is no different with momentum trading. A common strategy used to do this is to wait and watch for price to pullback into a supply or demand zone within the momentum.
The first step to doing this is identifying when price is making a strong momentum move. The chart example below highlights this with a strong move lower. After this, we are looking for a pullback higher so we can find a potential entry. As the example shows below price pulls back into the recent resistance level. This could be a possible entry level to go short with the momentum lower.
Momentum trading can be highly profitable when done correctly. An advanced exit technique is to use a moving average crossover to exit a trade entered on the 1 minute chart.
The Magic Momentum Method of Trading the Forex Market
In this respect the 15 period, smoothed, moving average based on the close price can be used. This advanced exit technique will only be used once you are happy with the basic approach. The way of adjusting the bull and bear areas as discussed previously comes close to achieving the same result as using the above moving average. Page 9 of It is therefore important to trade the Forex Market when trends are most likely to develop. The trick is to use this system at times when there is reasonable volatility in the market so that the trends that are entered into, last a reasonable time.
Times to avoid are when markets generally have low or very high volatility: The quite period between the Asian and European markets. The quite period between the US and Asian markets. Sometimes am produces some interesting moves as the European market closes while the US Market is still active.
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To convert these times to your local times use Page 10 of Use the 1 minute charts to develop your trading skills before moving on to the longer term time frames. Only trade at times when there is a good chance that the price will move quite well - Times Skills that you have to develop and be comfortable using this technique with are: 1. Setting up the charts 2. Drawing trendlines 3. Following the trading system 4. Trading profitably 5. Entering trades quickly 6. Exiting trades quickly 7. Reversing trades quickly 8.
Identifying trading setups quickly The technique is: Identify entry opportunities: 1. See a trendline violation or a 50 line violation on the RSI 2. Look for a corresponding trendline violation on the price chart 3. Enter the deal Exiting the deal using any of the techniques below: 1.
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Your stop is hit this is an involuntary option which should not happen that often 2. You reverse the direction of your trade whether you are positive or negative. The price crosses over the 15 moving average in a trending market. Bear in mind this is a beginner technique to ensure that you have the trading skills to identify trading opportunities quickly, enter deals efficiently and make a profit. As your trading experience increases:- you can investigate and apply filters that will make the technique even better and you can move onto longer time frames please try to do this only once you are trading the 1 minute charts profitably.
Page 11 of Stopped out a -5 on 2 nd lot. Best trend was only 30 pips at the end. Note that based on the trending market principle the crossing of the 75 line would have been the exit criteria of the last deal. Cashed the 2 nd deal in when the RSI indicator line moved over the 25 level. Ended the day s trading. Our traders certainly are achieving positive results just using these concepts.