hi traders
in today's video we'll be explaining
exactly what momentum trading is and
then go over a simple momentum strategy
we'll take you through
what momentum trading is
a powerful technical indicator to use
share a simple and powerful trading
strategy with trade examples
with that being said let's get into it
[Music]
momentum trading is a strategy where the
strength of price movements is used to
enter and exit positions
price momentum is similar to the concept
of momentum in physics where mass
multiplied by velocity gives the measure
of likelihood that the object will
continue on a given path
the term momentum was borrowed from
newton's first law of motion where an
object in motion tends to stay in motion
until an external force is applied to it
like in the law of physics a market in
motion tends to stay in motion rather
than the reverse
this is the reason why a momentum
indicator strategy is so powerful
momentum is determined by trade volume
and price change rates in the financial
markets
so to sum up the strategy relies on the
fact that if the price is moving
strongly in one direction it will
continue to stay on that path till the
trend loses momentum
so you can see here that according to
this principle an instrument that goes
up tends to continue going up until the
end of the trend
and of course the opposite is valid as
well when a forex pair stock or
commodity shows a bearish momentum
chances are high that the price will
continue going down
if we look at the big picture we can
notice that trends tend to continue and
we can use momentum to determine when to
buy and when to sell
there are other factors to consider as
well
and we are covering them in a bit
but in general this phenomenon occurs
because instruments with positive
momentum tend to have positive returns
shortly
and vice versa for those with negative
momentum
this is why we have found that momentum
is typically the best indicator for
swing trading
if you've watched the previous videos
where we traded forex in the live market
condition
you would know that i am a naked char
trader which means that the best way in
my opinion to trade forex is by looking
at price action this style is associated
with trading without any indicators on
charts based on real-time price trends
but when it comes to momentum it's
important to use some technical
indicators to get a clear picture of the
direction of the trend
there are a variety of different
momentum indicators but the best one in
my experience is the williams percent r
indicator
if you're on trading view you can add it
to your chart from the indicators
sections
before we continue with the strategy
make sure to change the length or period
from 14 to 40.
the most important points that we need
to know about this indicator are the
following
williams percent r moves between 0 and
negative 100.
a reading above negative 20 is
overbought
and a reading below negative 80 is
oversold
an overbought or oversold reading
doesn't mean the price will reverse
overbought simply means the price is
near the highs of its recent range and
oversold means the price is in the lower
end of its recent range
this indicator can be used to generate
trade signals when the price and the
indicator move out of the overbought or
oversold territory
now let's discuss a simple momentum
trading strategy that you can use to
trade forex
this is the nzd usd chart
this is one of my favorite pairs as it's
considered a carry trade currency so
investors will often buy the nzd
and fund it with a lower yielding
currency such as the japanese yen or the
swiss franc
in step one we need to define the trend
are we looking at an uptrend or a
downtrend
you can observe the price action and
define the latest swing high or low
in general an uptrend is usually
represented by a series of higher highs
followed by higher lows you can also use
the zigzag indicator to make life easier
we can notice here a clear uptrend as
price is forming a series of higher
highs now it's time to move on to the
second step
here i want you to look for bold
candlesticks that close near the higher
end of the candlestick in another word
we want to locate some clear bullish
engulfing pattern with a long body this
will serve as a second confirmation
which would increase the likelihood that
we are dealing with a high probability
trading setup
we can see that we have an ideal
representation of what we're looking for
the upside price movement is preceded by
big bullish candlesticks
this confirms the momentum behind the
trend
with that being said it's time to focus
on the williams percent r this is
probably one of the best 4x momentum
indicators
in our example we'll use it as a third
confirmation and an entry signal
so in step 3 we need to wait for the
williams percent r indicator to get to
the oversold level which is in general
below the value of negative 80.
then rallies above the negative 50 level
before buying
the best part about this strategy is the
fact that it gives us enough time to
check out the fundamentals if we're
looking for another confirmation
we can notice that the williams percent
r value is above negative 15 which means
that the pair is believed to be trading
at a level above its intrinsic or fair
value
so let's monitor the chart and wait for
the price to drop to negative 80.
we can notice that the price went
through a consolidation phase and the
williams percent r value dropped to
negative 80.
at this stage we can tell that the pair
is traded at a lower price and has the
potential for a price bounce
in general the oversold condition can
last for a long time and therefore being
oversold doesn't mean a price rally will
come soon or at all
in our example we're going to wait for
the williams percent r to rally to
negative 50.
once the value gets to that level we
immediately enter a long trade but how
to position the stop loss and take
profit
there are plenty of ways to position the
stop loss but according to the strategy
we should place it a few pips below the
latest higher low
alternatively as we progress you can
also trail your stop loss below each
most recent higher low
this method will allow you to lock in
the potential profits in case of a
sudden market reversal and give the
price enough room to fluctuate before
heading towards our take profit level
but what about the take profit
as this is a price action strategy
you can opt for a 1 to 1.3 at the
beginning and keep on changing it until
the price breaks below the previous
higher low
this will probably be the end of the
uptrend
you can notice this strategy would have
made us around 50 pips profit
now let's look at an example of a short
trade
the rules are pretty much the same
this is the euro usd one hour chart
we can notice the beginning of a
downtrend featured with a series of
lower highs
price has formed some bold bearish
candles along the way
remember that we're looking at a one
hour chart which means that every single
price action is meaningful and reflects
the actual status of the market the
candles here have a very short or
inexistent tail
which is regarded as a strong signal of
conviction by sellers
now let's look at the williams
percentage reading we can see that we
are in an oversold area so it's better
to wait for a few more hours
the reversal here has pushed the
williams percent r value from an
oversold to an overbought level
the key value here is negative 25.
the price continued its downtrend and
brought the williams percent r value to
negative 50 which is our signal to go
short
the stop loss should be put a few pips
above the latest lower high and we
should remain in the market until the
end of the downtrend which is usually
when the price records a new higher high
this trade alone has made 140 pips
profit
we can create a trading indicator for
the strategy let us know in the comments
section if you are interested and don't
forget the thumbs up if you want to see
us back testing this strategy 100 times
thanks for watching and don't forget to
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happy trading