In forex trading, the most common issue that all traders face is the management of time and remaining patient with the business. The core idea of trading is based on the volatility in the financial markets, it’s the fluctuation in the prices of currency or stocks that lead to traders generating the profit they make out of any deal. The real line is between the two kinds of traders, one that likes to trade on short-term and make money on every little move the market takes, while the other category comprises those that like to wait for the right time in the placement of order. It’s also these eager traders that keep the momentum of the trading market moving and lead it in the desired directions. However, when the market starts indicating a change arriving in it and it’s the same impatient traders that leave the trade and get off the bandwagon that they willingly joined. This is the reason a concrete momentum management strategy is very important to keep the profit generation going in a consistent manner.
The not so known technique of Momo trade is what helps the traders in placing a short-term trade and make a profit from the minutest upheaval that comes in the market. The following article will take forward the same idea and guide the reader with learning a strategy that can make him gain momentum in receiving the profit he seeks.
What is Momo?
Momo trade is denoted as a five-minute trade that’s done to keep the momentum or momo stay on short-term charts. The traders in conventional circumstances in these trades, follow two indicators, where the first is the 20-period exponential moving average (EMA). The Exponential Moving Average is selected because its emphasis is always on the recent development in the trade, and that is what the fast trade is based on. The moving average helps the trader understand the trends and take the trade in the closest to the desired direction, as explained in previous article Moving averages and forex strategy. While the second indicator that’s used is the moving average convergence divergence (MACD) histogram, and this is what helps the trader manage the momentum. This strategy is primarily dependent on a reversal trade as it waits to take advantage when momentum is moving in support of the reversal move to make a large extension burst. When the trade has come in a position like this, there are just two segments that lead to it, first that favors in winning and maintaining the position where a trader never has to go back to descending place. The other lets you recover from the risk of the large move when the stop has already been moved near to break even.
Rules for a Long Trade
- Find a currency pair that’s traded at below the 20-period EMA and MACD to remain negative.
- Wait until the price crosses above the 20-period EMA, and make sure that MACD is already in process to cross from negative to positive or has crossed into positive a territory which is not more than five bars ago.
- Go long 10 pips over the 20-period EMA.
- If the trader likes to have an aggressive trade, he can place the stop at a five-minute interval and a low difference. If he wants to have a conservative trade, the order can be placed at a stop of 20 pips below the 20-period EMA.
- Sell half of the position at the time of entry plus the amount risked; move the stop to the second half to breakeven.
- Find the stop through breakeven or the 20-period EMA minus 15 pips, whatever seems profitable.
Rules for a short trade
- Find the currency pair that’s traded above the 20-period EMA and MACD to be positive.
- Wait until the price crosses below 20-period EMA; and ensure that MACD is either already in the process to cross from positive to negative or has crossed into a negative territory which is no longer than five bars ago.
- Go short 10 pips down the 20-period EMA.
- If the trader wants an aggressive trade, he should place the stop at high on a five-minute chart. Those going for a conservative trade should stop at 20 pips above the 20-period EMA.
- Purchase back half of the position at the time of entry minus the amount risked to move the stop on the second half close to breakeven.
- Find a stop by lower of a breakdown or 20-period EMA plus 15 pips.
For instance, if we take the example of March 2006 rates, we see the price moving above the 20-period EMA when the MACD histogram crossed above line zero. Although there have been instances of the price attempting to change to move above the 20 periods EMA between 1.30 and 2.0 EST, a trade was not initiated at a time when the MACD histogram is below the zero line.
When it comes to short trade, the example can be given of the NZD/USD in March 2006. The price then crossed below the 20-period EMA, however, the MACD histogram remained positive, therefore the wait begins for it to reach the zero line in 25 minutes. Then, like the earlier pair of USD/JPY, the calculation gets a little messy here as the cross of the moving average hadn’t occurred at the time when MACD went below the zero line as it did with the EUR/USD pair.
Momo Trade Failure
All the actions that have been mentioned in the above article are happening in the five-minute Momo trade, which is a great strategy to keep the momentum-based reversal moves going. But, it doesn’t always help and its also important to study the instance of how and where it fails, so the movement is easy to understand.
When the five-minute momo trade strategy is followed, the most integral part that’s not be missed is that the trade should be kept loose and easy to achieve. Too tight, long and back to back trades just tire the trader and he loses the energy to trade. In trading hours when the prices are just fluctuating around the 20 EMA, MACD histogram may return back and forth giving wrong signals. And simultaneously in the alternate moments, these strategies are implemented in a currency bought with a trading range that’s too wide and high, this leads to stops be hit even before the target is triggered.
A momo trade is the advanced kind of a strategy which is strictly based on the momentum of a trade. In a momo trade, the trader is not very keen on going about the company’s fundamentals, rather he only focuses on the short-term direction of a security’s price movement. It can be said that momo trading is primarily used by day traders, as they like to trade short term without many intervals. Its also the same traders that like to keep the momentum of the financial market going and work with the volatility of trade, making profit from every instance and fluctuation to make the trade profitable to the fullest. This trading is conducted by day traders that like to keep it rapid and changing while the buy and hold traders are not the ones that opt for this kind of trading.