How To Trade High Momentum

Dear traders,

I'm a big fan of momentum trading. You might be wondering what is "momentum" in the Forex market? A basic definition would be that momentum measures the speed of a price change. The faster prices increase, the greater the increase in momentum. The faster prices decrease, the larger the decrease in momentum. For me, momentum is exceptionally important as it tends to propel the price directly in profits, provided that we have picked a clear and accurate entry. If the entry is bad, your position might be in a loss. The simple momentum MT4 indicator is found within any MT4 platform and it has been a part of many popular Forex systems.

The Simple Momentum Indicator

One of the most popular indicator-based momentum oscillators is constructed by subtracting a moving average from a closing price. When the close is above the moving average and accelerating upward from it, momentum is bullish and increasing; when the close is below the moving average and accelerating downward from it, momentum is bearish and getting even more bearish. Momentum works great in conjunction with various Forex patterns.

Marubozu Candle: Price Action Momentum Indicator

I have personally developed the so called "High Momentum trading strategy" and in my opinion it's the best momentum indicator both for scalping and day trading. Momentum is generally a leading indicator, and there's no better example of high momentum than a Marubozu candle.

A Marubozu candle is a basic single candle formation containing a very large and thick body. At the closing end of the candle, there shouldn't be any large wicks protruding from the body, and the closing price must be located aggressively towards the closing direction of the candle.

Let's say that if the candle closed higher than its open price – a bullish candle – then there should be no large upper wick. Conversely, if it closed bearish then we would like to see the close price located near the low end of the candle, with no large lower wicks poking out from the bottom of the body.

To qualify as a valid momentum candle, it's important that the range of the candle (high to low) is larger than the surrounding candles. The candle should have a dominant presence on the chart, which communicates that a decisive move took place during the candle's open period. For a momentum candle to be deemed valid, ideally there should be no wicks, however very small wicks are allowable (see the picture above).

You can also find examples of Marubozu candles in our advanced bearish candlestick and advanced bullish candlestick articles.

The Cause of Momentum Candles

The many different economic and fundamental variables that are constantly being fed into the markets are being reflected in raw price action on trading charts. Additionally, momentum candles are frequently fuelled by high-impact news events that have taken place, ones that cause a surge of orders in a specific direction, for instance. Momentum usually piggybacks from higher to lower timeframes.

High Momentum Practical Trading

The concept of trading the momentum, based on Marubozu, is simple enough: we're looking for the initial aggressive momentum that caused the Marubozu to continue on into the next trading hour or two. We want to basically piggyback momentum from the market and we're using it to catch the overflow or continuation of the move into the next session.

Rules For Trading High Momentum

1. Open H1 Chart;
2. Locate a Marubozu Candle;
3. Wait until the candle is closed, then pull a Fibonacci retracement tool;
4. Divide your entry into three position, keeping the risk under control;
5. Your entries are made on: 61.8, 78.6, 88.6 Fibonacci;
6. Don't wait for the candle to close, place your entry at the exact Fibonacci level, or a couple of pips away from it;
7. Your Stop Loss goes five pips above the candle for short entries or five pips below the candle for longs;
8. Targets are usually 38.2, and 23.6 Fibonacci retracements or the next major pivot point if the price goes above (for long entries) or below (for short entries) the Marubozu candle.

Ideally, entries should be made in next one to three candles. Maximum tolerance for an entry is the sixth candle after the Marubozu has been identified. Keep in mind that the best entries are always made if the Marubozu appears at support (for long entries) or at resistance (for short entries). High momentum trading also works best in a trending environment.

Test it First

Remember that you should only use this method after proper testing and in conjunction with a solid trading plan. Do not use Forex pairs if you're not familiar with them and the main reactions to various market conditions during a typical trading day.

High momentum trading works best on major Forex pairs (e.g. USD/JPY, EUR/USD, GBP/USD, USD/CHF). Recent backtesting of an Expert Advisor that follows this strategy has been pretty successful on a four hour time-frame and this leaves room for further improvements, such as four hour momentum trading.

There are multiple advantages to high momentum trading.

1. Screening time should provide traders with a better understanding of markets traded.
2. The possibility of quick returns on investment;
3. Ease of use.

Have in mind, that nothing will work in the long run if your risk is too high or you're leverage level is too high. If this is new to you, open a demo account and be sure to practise first.

Cheers and safe trading,

Nenad