Occasionally, price is able to accelerate further than any Forex trader expects. In these cases, the price has a strong impulse or thrust, and it keeps extending to new extremes. Even though catching an impulsive trade is great, what does a trader do when they miss the gravy train?
Traders can attempt to trade in the opposite direction. The probability of the price moving in the same direction decreases, while a counter momentum opportunity arises. But how and when does an FX trader enter the trade?
FADING THE MOMENTUM
I am an advocate of trading with the momentum. I attempt to enter a trade either at the breakout itself or shortly after a breakout. In certain cases, entering a trade when there is a high chance that momentum is fading can be lucrative.
The chances of a bounce (short), counter momentum (long), or reversal (very long) occurring are high. This is because the original momentum has to stop at one point or another. The currency cannot push into one direction forever without stopping. The danger of these setups is that traders anticipate the turning moment too soon.
Usually the 2 following scenarios occur after the momentum dies out:
- Price moves slow and tedious, which is a sign of flag or wedge. In this case, ‘fading the momentum,’ traders want to exit their counter momentum trade. This is because a new momentum in the same direction could occur at any second;
- Price has a similar momentum but then to the opposite side. This is the best scenario for the ‘fading the momentum’ trader.
There are methods to help Forex traders improve their odds of catching a bounce or counter momentum:
- Check whether the previous momentum is against the trend. Then there is a higher chance a thrust will occur to the opposite side. Be cautious when momentum is with the trend!);
- Use candlestick patterns to identify rounding formations;
- Use an oscillator to have an idea when the price has divergence or otherwise has overextended;
- Identify support and resistance zones nearby which are strong enough not to break.
IN THE MARKET, FOR EXAMPLE…
In a past trading day, the market had such a counter-trend momentum on several pairs. This includes the EURUSD, GBPUSD, AUDUSD, and USDJPY. They all continued with the USD strength – as expected.
This market offers similar opportunities, but on different currency pairs. At one time, GBPNZD, for instance, broke a channel to the downside (red lines). However, the breakout occurred, then the RSI was already near an oversold value (dark red circle). In the meantime, a bounce back up has occurred.
The downtrend momentum could continue as soon as the upside retracement is finished. I am keeping a close eye on 4-hour candlestick patterns at the broken trend line (up to the top) for potential shorts.
The same thing could be said for the GBPCAD. It offers trade setups in both directions: a bounce back up and a bounce back down.
Taking the, ‘fading the momentum,’ trade is an option when either trading the breakout or trading with the momentum are late. Just be cautious with trading against a bigger trend or when chart patterns emerge. A market exit at, about, break-even is often the best place to exit. Here is another article on forex trading advice and trade example.
Do you sometimes take these trades?
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