Short-Term Momentum Trading

Short-term momentum trading

This lesson will cover the following

  • A quick overview
  • Steps a trader needs to follow for this strategy

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There are traders, who lack the patience to wait more than a day for a single trade to develop. They favor situations when things develop instantly and any single trade become profitable during the next several minutes or else they will simply close the position. These are people, who prefer to take profits of 20 pips ten times within the trading day, instead of making a 120-pip profit on a single trade, while watching the market move initially, say 70 pips in the opposite direction.

A suitable approach for such people is the so called short-term momentum strategy. The general idea behind it is to make long or short entries only when momentum is on one’s side. In doing so, a trader aims to reach his/her first profit target as soon as possible. The following indicators can be used with this trading approach – the 20-day Exponential Moving Average (EMA), the 100-day Simple Moving Average (SMA) and the Moving Average Convergence Divergence (MACD) (the histogram settings can be – short-term EMA with a period of 12, long-term EMA with a period of 26, signal EMA with a period of 9 and closing prices). A trader needs to make his/her entry only when the MACD has turned within five candles. It is so, because the entry needs to be exactly when momentum is starting to build, not when it has already amassed.

What does a trader need to do?

Now let us talk about the steps a trader needs to follow in order to implement this strategy.

When going long:

First, the trader needs to spot a currency pair trading below both the 20-day EMA and the 100-day SMA;

Second, the trader needs to wait for the price to cross above both moving averages by at least 15 pips, while ensuring that the MACD became positive no longer than five candles ago;

Third, the trader needs to place a market order to buy, while the protective stop should be placed at the low price of the candle, which breached the moving averages;

Fourth, the trader needs to sell 50% of the position when the market moves in his/her direction by the amount put at risk. At the same time, the stop on the remaining portion of the position should be moved to breakeven;

Fifth, the trader needs to move the stop on the remaining portion of the position by the 20-day EMA minus 15 pips.

When going short:

First, the trader needs to spot a currency pair trading above both the 20-day EMA and the 100-day SMA;

Second, the trader needs to wait for the price to cross below both moving averages by at least 15 pips, while ensuring that the MACD became negative no longer than five candles ago;

Third, the trader needs to place a market order to sell, while the protective stop should be placed at the high price of the candle, which breached the moving averages;

Fourth, the trader needs to buy back 50% of the position when the market moves in his/her direction by the amount put at risk. At the same time, the stop on the remaining portion of the position should be moved to breakeven;

Fifth, the trader needs to move the stop on the remaining portion of the position by the 20-day EMA plus 15 pips.

Example

Let us take a look at the 5-minute chart of AUD/USD. On June 11th the pair broke above both the 20-day EMA and the 100-day SMA, following a period of consolidation during the Asian trade. The MACD has just entered into positive territory and what we expect next is a price break above both moving averages by at least 15 pips, so that we can make a long entry in the market. The EMA and the SMA crossed at 0.9370, thus, we go long the pair at 0.9385. Our protective stop is placed at the low price of the candle, that breached above the moving averages, or 0.9369. Our first profit target is the entry point plus the amount we risk. We entered at 0.9385, while the stop was placed at 0.9369, therefore, the amount we risk is 16 pips. Our first profit target will be 0.9385 plus 16 pips, or 0.9401. It is reached later in the day, so we sell 50% of our position, while moving the stop on the remaining portion of the position to breakeven. Later the price falls below the 20-day EMA, but only by a few pips. Since the market begins to move against us and we are unable to trail our stop by the 20-day EMA minus 15 pips, we decide to close the remaining portion of the position and squeeze 10 more pips at 0.9395. We do so by using a fairly good M2B setup. The total profit on the entire position, if we had two lots, would be 26 pips, or an average profit of 13 pips.

chart 4.0

chart 4.1

If you have any questions or suggestions you are welcome to join our forum discussion about Short-term Momentum Trading.
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