Best Momentum Trading Strategy
Implementing the best momentum trading strategy can be the ideal way to build and manage your trading account. Our team at Trading Strategy Guides believes that a momentum indicator strategy can reduce risk. It can also enhance your overall returns. We featured this strategy in our comprehensive guide for the best trading strategies we have discovered.
Momentum trading is a very hot topic in trading. According to the efficient market hypothesis, it shouldn’t exist. But its effects are widespread and it has been used by many Wall Street elites. They have made billions upon billions of dollars in profits.
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:
What is Momentum?
The term momentum was borrowed from Newton’s first law of motion. 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.
So, an instrument that goes up tends to continue going up:
And instruments that are going down tends to continue going down:
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.
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.
Pretty simple, right?
Using a momentum indicator strategy, it means we’re going to hold the trade for a short period of time. Anywhere between a few minutes and up to a few days. Basically, the best momentum trading strategy runs until the momentum drys out.
So, we only want to concentrate on the relative strength of any instrument.
Before we move forward, we must define what technical indicator we need. This will help us select the best momentum trading strategy and how to use it:
There are a variety of different momentum indicators. But the best forex momentum indicator is by far the Williams %R indicator. 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.
So, this brings some credibility to the best forex momentum indicator.
The preferred settings for the best forex momentum indicator is 40 periods.
The Williams %R runs on a scale from -100 to zero. A reading in the vicinity of -100 is an indication that the instrument is oversold. This means it’s a potential buying opportunity. Once it reaches zero, that’s an indication of overbought and maybe the time to sell.
Now, let’s see how you can effectively trade with the best momentum trading strategy. 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.
The Best Momentum Trading Strategy using the Best Forex Momentum Indicator
Our team at Trading Strategy Guides believes that smart trading is the way to build the best momentum trading strategy. In this regard, we don’t want to predict when the momentum will happen, but we let the market tips his hands and then react.
One principle of the momentum indicator strategy is, “buy high to go higher” and “sell low to go lower.” In other words, we trade in the direction of the trend while having the momentum on our side. Also read the hidden secrets of moving average.
Moving forward, we present the buy side rules of the best momentum trading strategy.
Step #1: Define the Trend. An Uptrend is defined by a Series of HH Followed by a Series of HL.
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.
For active traders, we also look at the actual price action in order to gauge momentum. Besides reading the best forex momentum indicator.
Step #2: In an Uptrend Look for Bold Candlesticks that Close Near the Higher End of the Candlestick .
A technical analysis concept is that you want to use multiple confirmation signs when buying and selling. This will increase the likelihood that’s a high probability trading setup.
In this regard, the momentum trading strategy besides using the best Forex momentum indicator, also incorporates the price action.
A practical way to read momentum from a price chart is to simply look at the candlestick length. What we want to see in an uptrend is big, bold bullish candlesticks that close near the higher end of the candlestick.
In the figure above, we have an ideal representation of what we’re looking for. The upside price movement is preceded by big bullish candlesticks. This confirms the momentum behind the trend.
Now, it’s time to focus on the Williams %R. This is the best forex momentum indicator. Which brings us to the next step of our momentum indicator strategy.
Step #3: Wait for the best Forex Momentum Indicator to get oversold (below -80). Then rallies above the -50 level before Buying .
We’re going to use Williams %R, the best forex momentum indicator in a smart way. In an uptrend, we buy after the best forex momentum indicator has reached oversold conditions (below -80). And then rallied back above the -50 level.
Now, we have confirmation from both the price and the best forex momentum indicator. The real momentum is behind this trend and the probabilities are in favor of more upside prices from here on.
Note* If the best forex momentum indicator continually stays in overbought territory (above -20 level), it signals a strong momentum and conversely a strong trend. Inversely the same is true in a downtrend.
The next important thing we need to establish is where to place our protective stop loss.
Step #4: Place Your Protective Stop Loss below the Recent Higher Low.
We want to hide our protective stop loss. It is below the most recent higher low level that formed right before the best momentum trading strategy issue the buy signal.
Alternatively, you can also trail your stop loss below each most recent higher low. This strategy will allow you to lock-in the potential profits in case of a sudden market reversal.
Last but not least the momentum indicator strategy also needs a place where we need to take profits, which brings us to the last step of the best momentum trading strategy.
Step #5: Take Profit once we break below the Previous Higher Low
A trend in motion can stay in that state longer than anyone can anticipate. And since we want to maximize our potential profits we let the market tips it hands before liquidating our trades. In this regard, we look for a break in the trend structure. Respectively a break below the most recent higher low.
Alternatively, you can take profit once the best forex momentum indicator breaks below the -50 level.
Note** The above was an example of a BUY trade using the Best Momentum Trading Strategy. Use the same rules for a SELL trade. In the figure below you can see an actual SELL trade example.
Take a look:
The best momentum trading strategy leverages the tendency of a market’s price to continue moving in a single direction. This is where the momentum might be upwards or downwards. In essence, market timing is crucial for a momentum indicator strategy. And in this regard, we incorporated the best Forex momentum indicator (Williams %R) in our momentum strategy. Here are some of the trading conditions you want to avoid in the forex market.
Timing the market can be a daunting task. But our team at Trading Strategy Guides believes that using a pure price action can get you a long way. Check out our Price Action Pin Bar Trading Strategy.
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