Momentum Part 2

In my last post, I talked about not ignoring momentum and showed that momentum can often be opposite of the trend.

This post is going to show how we can use the information to find some trades.

To avoid cherry picking, I am going to use the first time the momentum diverges from the price trend.

Trading Chart Setup

The overall trend is up but the momentum on the higher time frame has turned down.  This will make long trades on the shorter time frame risky at best.

We have to keep in mind that the overall trend is UP and have an idea where price may turn back to the upside.

Off the daily chart, we have a resistance area that was broken through (it is off to the left of this chart).  Price often tests these areas so not a bad place to keep in mind.  It is also the 50% retrace from the pivot low that is just off this chart.

So what can we do? 

As long as the momentum from the higher time frame is short, we can grab shorts as long as we keep in mind and keep informed about the state of the daily momentum.

Keep Trading Simple

In order to show how simple ( but not easy ) trading can be, I am going to simply trade pullbacks into the same EMA as used before to show trend.  I will only take the trades when the momentum, shown below, turns back into the momentum from the higher time frame.

I will also only take the trades when the momentum shifts near or above the top dotted line in the momentum window.

Furthermore, the trigger to get the trade going will simply be a break of the low of a candle that appears after the momentum shift.

Targets? 

Pivot areas off the chart I am looking at.

What you see is:

• 4 trades
• 3 winners
• 1 loser
• 60 pips or so of profit after spread cost of 2 pips.

This chart also tells a story. 

We see price break above the EMA and never pull away from it as seen in the green box.  Shorter time frames lead the higher ones and soon after, the momo on the higher time frame goes sideways.  It then turns to the upside back in the direction of the trend.

We are going against the trend on the higher time frame so we must keep our expectations in check.  You can, if you choose, stand aside any short setups and wait for the turn on the higher back in the direction of the trend.

I hope these last few posts about momentum has added something to your trading knowledge.  You can use this information even if you already trade a system/method.  It is just another cog that may keep you consistent and on the path to a profitable trader.

Miss part 1 of this series?  Click here.