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 improve your overall return. We’ve featured this strategy in our extensive guide to the best trading strategies we’ve discovered.
Momentum trading is a very hot topic in trading. According to the efficient market hypothesis, it should not exist. But its effects are widespread and it has been used by many Wall Street elites. They earned billions of dollars in profits.
We are going to review core market principles. Most importantly, momentum precedes price. In this sense, a strategy for momentum indicators is more like a trend following strategy. We recommend that you review the trend trading strategy for a simple but effective method that follows.
Before we explore the best momentum trading strategies, you need to define what the momentum indicator strategies are:
What is Momentum?
The term momentum is borrowed from Newton’s first law of motion. The law states that where an object in motion tends to remain in motion until an external force is applied to it. As in the laws of physics, a moving market tends to stay in motion rather than reverse. This is why a strategy for momentum indicators is so powerful.
Also read about the disappearance of the momentum in Forex Trading.
Thus, an instrument that goes up tends to continue:
And instruments that go down tend to keep going down:
Essentially, the trend is to continue, and we can use momentum to determine when to buy and when to sell. This is because instruments with positive momentum in the near future tend to have positive returns. And vice versa for those with negative momentum. Therefore, we have found that momentum is typically the best indicator for swing trading.
There are different explanations for why the price momentum occurs. Each bias has its own name and psychological explanation.
The simplest explanation is that rising prices attract buyers and falling prices attract sellers. Our best strategy for momentum trading is based on this simple explanation.
Pretty simple, right?
Using a strategy for momentum indicators, this means that we will hold the trade for a short period of time. Anywhere between a few minutes and a few days. Basically, the best strategy for momentum trading is running until the momentum dries up.
So, we just want to concentrate on the relative strength of any instrument.
Now….
Before moving forward, we need to determine which technical indicator we need. This will help us choose the best strategy for momentum trading and how to use it:
There are a variety of different momentum indicators. But the best indicator for forex momentum 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 the legendary trader Larry Williams who invented it. Larry Williams has 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 of -100 to zero. A reading in the vicinity of -100 is an indication that the instrument is oversold. This means that this is a potential buying opportunity. Once it is zero, it is an indication of an overbought and perhaps the time to sell.
Now let’s see how you can trade effectively with the best momentum trading strategy. You learn how to profit using the best forex momentum indicator. We also have training on how to use currency strength for trading success.
The best strategy for the Momentum Trading using the Best Forex Momentum Indicator
Our team at Trading Strategy Guides believes that smart trading is the way to build the best strategy for momentum trading. In this respect, we do not want to predict when the momentum will occur, but we let the market win its 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 we have the momentum on our side. Also read the hidden secrets of moving average.
Moving forward, we present the buy-side rules of the best strategy for momentum trading.
Step #1: Define the trend. An uptrend is defined by a series HH followed by a series HL.
The definition of an uptrend is very standard. In an uptrend, we are looking at a series of higher highs followed by a series of higher lows. Two HH followed by at least two more HL is enough to define a trend.
A higher pitch is simply a swing height that is higher than the previous swing height. Whereas 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 may not have a trend.
For active traders, we also look at the actual price action to determine momentum. Besides reading the best forex momentum indicator.
Step 2: In an uptrend, look for fat candlesticks that close near the higher end of the candlestick.
A technical analysis concept is that you want to use multiple confirmation signals when buying and selling. This will increase the likelihood that it is a high probability trade.
In this regard, the strategy for momentum trading, in addition to using the best Forex momentum indicator, also includes 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 are big, fat bullish candlesticks that close near the higher end of the candlestick.
In the figure above we have an ideal representation of what we are looking for. The upward price movement is preceded by large bullish candlesticks. This confirms the momentum behind the trend.
Now it’s time to focus on the Williams% R. It is the best forex momentum indicator. This brings us to the next step of our strategy for momentum indicators.
Step #3: Wait for the Best Forex Momentum Indicator to be oversold (below -80). Then take above the -50 level before buying.
We are going to use Williams%R, the best indicator for forex momentum, in a smart way. In an uptrend, we buy after the best forex momentum indicator reaches oversold conditions (below -80). And then retraced above the -50 level.
Now we have confirmation of both the price and the best forex momentum indicator. The real momentum is behind this trend and the probability is in favor of more upward prices from now on.
Note * If the best forex momentum indicator continuously stays on too high territory (above -20 level), it indicates a strong momentum and conversely a strong trend. Reverse is the same in a trend.
The next important thing we need to determine is where to place our protective stop loss.
See below…
Step 4: Place your protective stop loss below the recent higher layer.
We want to hide our protective stop loss. It is below the most recent higher low level formed before the best strategy for momentum trading issues the buy signal.
Alternatively, you can also drop your stop loss below each latest higher low. This strategy allows you to lock in the potential profits in case of a sudden reversal in the market.
Last but not least, the momentum indicator strategy also needs a place where we need to take profit, which brings us to the last step of the best strategy for momentum trading.
Step #5: Take profit as soon as we lower below the previous high
A trend in motion can stay in that state longer than anyone might expect. And since we want to maximize our potential profits, we let the market get hints before we liquidate trades. In this regard, we are looking at a break in the trend structure. Respectfully a break below the latest higher low.
Alternatively, you can take profit as soon as the best forex momentum indicator breaks below the -50 level.
Comment ** The above was an example of a BUY trade with the best strategy for the Momentum trade. Use the same rules for a SELL trade. In the figure below you can see a real example of SALE.
Look:
Summary
The best momentum trading strategy takes advantage of the tendency of the price of a market to move in a single direction. This is where the momentum can be up or down. Essentially, timing the market is essential to a momentum indicator strategy. And in this regard, we have included the best Forex momentum indicator (Williams%R) in our momentum strategy. Here are some 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 pure price action can get you far. Check out our Price Action Pin Bar Trading Strategy.
Thanks for reading!