Momentum

[JTrader]

Hi

momentum can increase when prce breaks out of a range, or when S/R breaks.

Momentum in one direction can also occur,on its own as a strong trend/direction starts to seemingly form, and perhaps you don't always need to wait for a range or S/R level break to take trades based on momentum.?

WIth EURUSD for example, if you see price starting to move quickly in one direction, a trade may jump on board, in the hope that they'll at least be able to bag a handful of pips.

Does anyone trade on this basis? i.e. Not waiting for momentum to increase once a range or S/R level is broken, but purely on thebasis that price has increased speed, and your hoping/guessing that it will go further in your favour/chosen direction?

If so, any specific insights into how such a technique can be used effectively would be greatly appreciated.

Thanks a lot.

 

[tradewinds]

I think you would have to answer these questions first

1. How many is a "handful of pips"?
2. What risk management will you use. I ve got a feeling for this type of system that you will need very good risk control and trade management. You will experience lots of times where price doesnt follow through. Maybe a success rate of 3/4 out of 10. Meaning you need a good risk/reward ratio.
3. You may need a volatility based stop.
4. What time frame will you trade.
5. What time in the session will you trade because we know that the Euro/USD only really comes to life at certain times of the day.
6. How will you quantify the entry and exit rules so its isnt left up to the whims of your subjective.
7. You need to think about what instruments you will use to measure momentum.,ie, looking at range market or trending market. The longer the market stays in a range the more likely a break out is imminent. But how do you measure the range? Maybe you need to develop a moving range indicator...same concept as moving average only it measure range. For example you could measure the high and low from the last 3 hour candles,ie, the high/low of the last 3 hours, but have this moving. That means when the next hour candle begins the last hour drops off. When the range is decreasing we know we are moving into a range market and when the range is increasing then we may have a small or maybe a large trend beginning. You could have two different ranges like the 10 hour moving range and 3 hour range which gives you a contrast between the longer term range and short term. This can tell you alot about a market.

For example, if the 10 hour range is high but decreasing it denotes a market that has been trending but is contracting again, if the 3 hour range is growing at the same time then this may signal that a new trend is beginnning.

If the 10 hour range is low and the 3 hour range is low then this denotes a market that has been range bound for a while and when the shorter term range begins to increase then we may have a trend beginning or at least some price action or direction.

As way of entry I would use break out from the above the high or low of a previous candle, at the top or bottom of a range respectively. I would use a volatility based stop which should work well because you are trying to get into a market that is gaining momentum from a market that has been flat, so volatility should give your position a chance to breath with out getting stopped out.

Also I think its important to use a pair with a small spread like euro, usd/jpy etc.

If you develop a robust system it should work in most time frames. However I will say it again that you r risk and money management will be the most important factors.

Hope this helps. I m basically trying to use systems, longer term based and some short term systems that can detect changes in price in the early stages which may or may not develop into larger price movement.

Just concentrate on the process of the system and look at each detail and ask why am I making this decision, what does this tell me?How can it help?

 

[JTrader]

Hi
by handful of pips, I mean around 3-5 or so pips profit, and perhaps with the possibility of more - perhaps some people can judge that when say price is moving at such a pace, if they enter now, they are likely to be able to make a few pips profit, befroe a pull-back?

I only know how to trade based on momentum after significant range/ S&R breakouts have occurred, and would not feel comfortable entering a trade based purely on an increase in momentum/speed up in price movment, as price can just as easily reverse against you (especially after economic news) but perhaps others do this effectively, and know what to look for?

Thanks.

 

[tar]

Hi

momentum can increase when prce breaks out of a range, or when S/R breaks.

Momentum in one direction can also occur,on its own as a strong trend/direction starts to seemingly form, and perhaps you don't always need to wait for a range or S/R level break to take trades based on momentum.?

WIth EURUSD for example, if you see price starting to move quickly in one direction, a trade may jump on board, in the hope that they'll at least be able to bag a handful of pips.

Does anyone trade on this basis? i.e. Not waiting for momentum to increase once a range or S/R level is broken, but purely on thebasis that price has increased speed, and your hoping/guessing that it will go further in your favour/chosen direction?

If so, any specific insights into how such a technique can be used effectively would be greatly appreciated.

Thanks a lot.

I am very intrested in this way of trading ( u enter with the crowd ) , but the target should be more than 3-5 pips specially on cable , but there is several problems :
1- How to calculate the speed of price ? by price action and ATR , what else .... ?
2- How tight your stop loss should be ? in my case the cable ... ?

Any thoughts

 

[bbmac]

Thrust candles (candles where the body is at least 3/4 of the entire length of candle including the wicks) imply momentum and like the example below can be used to gain a hi-probability break of a support/resistance area / price congestion.

Similarly they can be used to gain an entry to a trend that exists on the time frame above.

You would buy/sell the close of the candle with stop at the other extreme for safety.

 

[options]

Essentially, a break of any trend up, down and sideways is going to have momentum behind it

 

[tar]

Thrust candles (candles where the body is at least 3/4 of the entire length of candle including the wicks) imply momentum and like the example below can be used to gain a hi-probability break of a support/resistance area / price congestion.

Similarly they can be used to gain an entry to a trend that exists on the time frame above.

You would buy/sell the close of the candle with stop at the other extreme for safety.

I didnt understand your example sorry , about the stop loss if u want safety stop it will ruin your r:r and it will be difficult to recover from 3 losses in a row ....

 

[bbmac]

I didnt understand your example sorry , about the stop loss if u want safety stop it will ruin your r:r and it will be difficult to recover from 3 losses in a row ....

I was pointing out where the safest place for a stop would be if trading the close of a thrust (implying momentum) candle in the examples of 'with higher t/f trend' and supp/res/congestion break-out.

As for risk:reward, that is up to the individual trader and should be optimised safely to the historical probability of the trading edge. If as you suggest, 3 consecutive losing trades would be '...difficult to recover from ' then I suggest that your risk is too high or that the strike rate of the edge is too low such that a losing run causes you a psychologically de-stabilising loss in account and/or your confidence in the trading edge, the corollary of that being that it becomes progressively harder to place the 'next' trade for fear of adding to the losses.

Such a circumstance effectively interferes with the historical proven probability of the trading edge achievibng it's strike rate over the sample of times it sets-up. (Ie know the probability of a consecutive losing run at your given historical strike rate.)

For any trading edge;

a. Ensure that you know it's historical strike rate over an extended sample that encompasses all market conditions.
b. If the strike rate fits your tolerances ensure that you calculate your risk such that it does not cause you to suffer a destabilising loss in your account or a destabilising psychological effect, as decsribed above.

 

[oiltanker]

momentum is what automated strats use. a human can't think fast enough for long enough.

the maths guys who code hedge fund momentum strats start from the point that price has no memory [they laugh at TA which is all about a belief in price memory -a belief they equate with believing in santa].

from the research i've done momentum breakouts is big in the auto strat market. they might trade 200 300 times a day from 4 bar ranges on electronic data that hasn't even reached the screen in graphical form.

there must be a price speed profit curve somewhere where the automated strat takes profit when the curve begins to flatten from the initial thrust. so they must superimpose that curve somehow on the price. if one looks at a chart one sees lots of small ranges and thrusts maybe for 10pts. then another range etc

as more and more automation enters the market, some markets are over 60% automated now, it can only speed up. which why a lot of people won't trade under 1hr if not 1 day time frames?

exactly how momentum is used is a closely guarded secret in the hedge fund world. Maths professors say their students have to sign secrecy contracts. So they have a rough idea of what is going on but not specifics.

one strat they do use [there is a maths course at oxford uni on this] is to target chartists and trade against them. they must figure chartists are more predictable than the price and so easier to make money off them?

 

[montmorencyt2w]

Something to think about next time the market reverses, takes out your stop, then reverses again, back in the direction of your trade. Possibly not an accident.


Regards,
M.