Top 3 Best Momentum Trading Strategy

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We selected the three best strategies and combined them into one article. Everyone chooses a strategy that suits them. How to trade is up to you.

What is Momentum?

Newton’s first law of motion inspired the term momentum. The law insinuates that an object in motion tends to stay in motion unless an external force is applied to it. Like the law of physics states, a market in motion tends to stay in motion rather than the reverse. This is why momentum indicator trading strategies are so effective. Read about Fading the Momentum in Trading as well.

As a result, an instrument that is rising tends to continue rising:

What is Momentum?

And instruments on the decline tend to stay on the decline:

Tend to stay on the decline

In general, trends tend to persist, and we can use momentum to forecast when to buy and sell.

This is attributable to the fact that instruments with positive momentum are more likely to generate good returns in the near future.

Trends tend to continue in general, and we can use momentum to predict when to transact. This is because instruments with positive momentum are more likely to produce positive returns in the near future. Negative momentum works in the opposite direction.

This is why we’ve determined that momentum is the most powerful swing trading indication. Price momentum can be explained in a variety of ways. Each prejudice has its own name as well as a psychological rationale behind it.

The most basic reasoning is that rising prices attract buyers while declining prices appeal to sellers. This basic explanation is the basis of our finest momentum trading strategies.

Isn’t it straightforward?

When a momentum indicator is used, the trade is held for a shorter amount of time. It could take anything from a few minutes to several days to complete. Generally, the ideal momentum-based trading strategy is to maintain trading until the momentum ceases.

So, we’ll only focus on the relative strength of any instrument.

Before we proceed to list momentum-based trading strategies, we must first determine what technical indication we want. This will enable us in determining the optimal momentum trading strategies and how to execute them:

There are many different types of momentum indicators. However, the Williams % R indicator is by far the best forex momentum indicator. The greatest forex momentum indicator will help us in detecting lucrative day trading opportunities.

 Williams % R indicator

The best momentum indicators are named after Larry Williams, a renowned trader who designed it. Larry Williams had remarkable success with the best forex momentum indicator. He walked away with millions of dollars in profit.

As a result, the best forex indicator acquires some credibility.

For the best forex momentum indicator, 40 periods is the optimal setting. The Williams % R is calculated on a scale of -100 to zero. A value reading of -100 indicates that the instrument is oversold. This indicates a possible buying opportunity. When it reaches zero, it simply implies an indication of being overbought, and it may be time to sell.

Overbought, and time to sell.

Let’s look at how you can use the best momentum trading strategies to trade effectively. You’ll master how to earn profit from the forex momentum indicator. We also provide training about how to trade successfully using currency strength.

Forex Trading Strategies: Momentum in Forex

Strategy №1

Building and managing any trading account is very necessary but it requires one to employ the best momentum forex trading strategy. A momentum indicator technique, according to our staff, can minimize the risks. It can also boost your overall profits. This approach was highlighted in our comprehensive guide to the greatest momentum trading strategies we’ve found. If you’re not sure what forex is, go here.

Momentum trading is a popular topic in the trading world. According to the efficient market hypothesis, it shouldn’t exist. Nevertheless, its impacts are pervasive, and many Wall Street elites have adopted it. They have generated billions upon billions of dollars.We’ll go through basic market principles. The most important thing is that momentum comes before price. A momentum indicator strategy is similar to a trend following a forex strategy in this manner. We advocate analyzing The Trend Following Trading Strategy for a basic yet successful trend-following strategy.

Strategy №2 Momentum with Stochastic and MACD Trading System

60 minutes, 240 minutes, daily, and weekly time frames are available. Any currency pair.

MACD Indicator (MACD) (12,26, 9). Stochastic oscillator with 20 and 80 levels (5,3,3).

Momentum with Stochastic and MACD Trading System

Buying Guidelines: The currency is in an uptrend when the histogram is above zero. Then we want it to gradually decrease until it reaches zero. We want it to reverse and go up again as it approaches zero.

Buying Guidelines

How should we enter a long (buy) trade? We must first identify a turning point on the MACD histogram. This indicates that the blue histogram bars should be above zero before starting to decline. Finally, it should reverse and go up again.  After we’ve verified that the MACD histogram’s conditions are met, we should check the stochastic indicator’s position: it should be in the oversold area (around level 20); the two lines should cross each other, and the lines should be facing up. At least one of the averages ought to be lower than level 20.

 stochastic indicator's position

This is the time to figure out the exact entry point. We must wait for the candlestick that caused this scenario to close before seeing the histogram increase again and the stochastic decline to the oversold zone. This trade should be entered as soon as the candlestick closes. Consider the following case:

Entry point when this bar closed

From this example, it’s vividly clear that the histogram is pointing up and the stochastic lines have crossed on their way up at the oversold level.

Enter when this bar closet. The slope turns up

On the oversold zone, level 20, the histogram is facing up and the stochastic lines have crossed each other. We’d like to bring up something really essential. It occurs when the histogram is above level 0 and then falls below level 0. If this occurs (i.e., if it falls below level 0), it must instantly reverse and rise above this level on the next bar to be considered a valid trade setup. The stop loss is set 1 pip below our base candlestick, which is the candlestick in which all of the conditions have been met. For instance:

Target position and stop loss

We’ll conclude the trade in two stages: the first will close 80% of the trade, and then in the second one, we will close the remaining 20%. Learn how to trade in forex here. The First Take Profit goal is to aim for a profit ratio of 1:1 between stop loss and take profit. If we risk 50 pips, for example, our take profit target will be 50 pips. We’ll close 80 % of the total of this trade when the price reaches the first take profit target. We’ll adjust the stop loss to the breakeven point (that is, to the trade’s opening price). The second profit target is equal to the trading stop loss multiplied by two. For instance: Our second profit target is 100 pips if we risked 50 pips. This is a screenshot of the second target:

Second Take Profit Target

That’s all about it…

Our initial take profit target is met successfully in 80% of trades, and our second profit target is met in 45 % of trades. This method has consistently provided remarkable results, and we are confident that if you learn it, you’ll see a change in your bottom line as well. The ideal time to trade forex is now. Sell the currency when it’s in a downward trend when the histogram is below zero. Then we want it to gradually decrease until it drops towards zero. We want it to reverse and go up again as it approaches zero.

Breaking above -50 Level

What is the best way to enter a short (sell) trade? To begin, we should determine a turning point on the MACD histogram. This implies that the histogram should be below zero level at first, then begin to rise. Finally, it should reverse and start to descend again.

How should we enter a short (sell) trade?

Once we’ve verified that the MACD Histogram’s conditions are met, we need to go to the Stochastic indicator and check its position: it should be in the overbought area (around level 80); the two lines should cross each other, and the lines should be facing down.

time to figure out our specific entry point

This is the time to figure out our specific entry point. We must wait for the candlestick that caused the histogram to fall again and for the Stochastic to reach the overbought area to close. We should enter this short sell trade as soon as the candlestick closes. This is what a short sell trade looks like:

specific entry point

The stop loss is set 1 pip above our base candlestick, which is the candlestick in which all of the conditions are met. We should add the spread to the stop loss in a short trade, so we place the stop loss 1 pip+ spread above the high of our base candlestick.

stop loss 1 pip above our base candlestick

Here I’ll close the trade in two parts: 80% of the trade initially, and then the remaining 20%. First Take Profit Target My first take profit goal is to set a profit target of a 1:1 ratio between the stop loss and the take profit. For example: If I risk 50 pips, my take profit target will be 50 pips. When the price reaches the first take profit target, I’ll close 80% of this trade. Second Take Profit Target After the first part of the trade has been closed, I’m going to change the stop loss to breakeven (that is, to the trade’s opening price). The second profit target is twice the stop loss. For example:  If I’ve risked 50 pips, my second profit target is 100 pips.

Second Take Profit Target

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Strategy №3

What is momentum day trading all about? As a new trader, one of the first lessons I learned was that the only way to profit is to pick stocks that are moving. The good news is that there is a stock that moves 20-30% or more practically every day! This is a proven fact. 

How then can we identify those stocks before they make a significant move? The most important discovery I had that resulted in my success has been that stocks that move 20%-30% have some technical characteristics in common.

Before we proceed any further, let’s take a step back and consider what we need from a momentum day trading strategy. First and foremost, we require a moving stock. Stocks that are trading sideways are meaningless.

A trader’s initial step is to identify the stocks that are moving. To identify these, I use stock scanners. I only trade extremes in stocks. This suggests I’m looking for a stock that has a once-a-year event. Almost always, the price action linked with this occurrence is the cleanest.

The Best Momentum Trading Strategy using the Best Forex Momentum Indicator

Smart trading, according to our team at Trading Strategy Guides, is the greatest technique to construct the best momentum trading strategies. We don’t want to foresee when momentum will occur in this area, so we let the market tip its hands and then react.

“Buy high to go higher” and “sell low to go lower” is one of the principles of the forex momentum trading strategies. In other words, we trade in the trend’s direction while benefiting from momentum. Also, check out the hidden secrets of moving average.

We’ll now go over the purchase side rules for the top three greatest stock trading techniques among the best forex day trading strategies.

Step #1: Define the Trend. A Series of HH Followed by a Series of HL defines an Uptrend

A typical definition of an uptrend is indeed standard. A sequence of higher highs followed by a sequence of higher lows is indicative of an uptrend. An upswing is defined by two HH followed by at least another two HL.

A higher high is just a higher swing high point than the previous swing high point. A higher low, on the other hand, is just a swing low that is higher than the swing low before it.

Stock trading strategies

The trend being our friend is typically a fact known by all momentum traders. However, we may not have a trend if there is no force behind it. We also look at actual price action in order to gauge momentum for active traders. Besides that, read about the best forex day trading strategies.

Step #2: In an Uptrend Trend, Look for Bold Candlesticks that Close Near the Candlestick’s Higher End

When buying and selling, a technical analysis notion is to employ several confirmation signs. This increases the chances of a high-probability trade setup.

In this way, momentum trading strategies of stock combine price action in addition to the best Forex momentum indicator.

Best Momentum Trading Strategy using the Best Forex Momentum Indicator

Simply looking at the candlestick length is a practical approach to reading momentum strategy forex from a price chart. Big, bold bullish candlesticks that close at the higher end of the candlestick are what we would like to see in an uptrend. 

We have an ideal representation of what we’re looking for in the diagram above. The price rise to the upside is preceded by large bullish candlesticks. This only adds to the trend’s momentum.

It’s now time to concentrate on the Williams % R. These are the best momentum indicators for forex. This leads us to the next step of our momentum indicator technique.

Step #3: Wait for the best Forex Momentum Indicator to become overvalued (below -80). Before buying, wait for it to rally above the -50 level.

We’ll make good use of Williams % R, the best forex momentum indicator. We buy in an uptrend when the strongest forex momentum indicator reaches oversold levels (below -80). The price then rose above the -50 level.

Wait for the best Forex Momentum Indicator

Both the price and the forex momentum trading indicator have now confirmed our hypothesis. This trend has genuine momentum behind it, and the odds are in favour of higher pricing from now onwards.

Note: If the best forex momentum indicator is consistently in the overbought area (above the -20 level), it indicates high momentum and, conversely, a strong trend. In a decline, the opposite is true.

The next crucial decision we need to make is where to put our protective stop loss.

Check out below…

Step #4: Set your protective stop-loss order below the recent higher low.We’d like to keep our defensive stop-loss hidden. It’s below the most recent higher low, which was created just before the best momentum trading strategy issues the buy signal.

Place Your Protective Stop Loss

You can also trail your trading stop loss below each of the most recent higher lows. In the event of a market reversal, this day trading technique will allow you to lock in possible winnings.

Last but not least, the momentum indicator forex strategy requires a profit target, bringing us to the final phase of the top three best momentum trading strategies.

Read:

Why Your Winning Rate Is So Low?(Opens in a new browser tab)

Step #5: Take profit when we break below the previous high low.

A trend in motion might last for far longer than anyone expects. We let the market tip its hands before liquidating our trades because we want to maximize our prospective winnings. In this particular instance, we are looking for a trend break. A break below the most recent higher low, respectively.

forex indicator breaks below the -50 mark, you can make a profit

Alternatively, if the best forex indicator breaks below the -50 mark, you can make a profit.

Note**A BUY trade using the Best Momentum Trading Strategy was shown above. Follow the same steps for a SELL trade. An example of a SELL trade is shown in the diagram below.

Check it out:

+185 pips profit

source

Day Trading Strategies & The Anatomy of Momentum Stocks

There are a few elements that all momentum stocks have in common. If we scan 5,000 stocks for simply the criteria listed below, we’ll usually end up with a list of fewer than 10 stocks each day. These are stocks that have the ability to move 20% to 30%. These are the stocks I trade as a trader to make a living. How to trade in forex without deposit.

Criteria #1: Under 100 million shares in afloat.

Criteria #2: Strong daily Charts are the second criterion (above the Moving Averages and with no nearby resistance).

Criteria #3: At least 2x above average High Relative Volume.

(This compares today’s volume to the typical volume for this time of day.)Criteria #4: A fundamental catalyst, such as a PR event, earnings, an FDA announcement, activist investors, or any other breaking news. Without a fundamental catalyst, stocks can also experience momentum. A technical breakout occurs when this transpires.

Finding Stocks for My Day Trading Strategies

Stock scanners enable me to search the whole market for stocks that meet my criteria for having momentum. A day trader’s most essential tools are these scanners (Trade-Ideas Stock Scanner Software). I analyze the candlestick chart and attempt to get an entry on the first pullback after the scanners to give me an alert.

Day Trading Strategies & The Anatomy of Momentum Stocks

The majority of traders will buy at this spot, resulting in a rise in volume and a swift price change as the stock rises. As a new trader, your duty is to learn how to find the entry in real-time.

For three different sorts of scanning, I designed three sets of stock scanners. I have scanners for momentum day trading strategies, reversal day trading strategies, and pre-market gappers. These three scanners provide me with a slew of trade notifications on a daily basis.

I can observe which stocks are in play without having to manually flip through charts. Every trader nowadays should use stock scanners to find hot stocks, even if they are penny stocks, small caps, or large caps.

Best Momentum Indicators: My Favourite Momentum Day Trading Chart Patterns

Bull Flags are my very favorite charting pattern; in fact, I’m so fond of them that I’ve dedicated an entire page to them. This pattern appears practically every day in the market, and it provides low-risk entry points into strong stocks.

Finding these patterns in real-time is the most difficult part, especially for many new traders. The stock scanners I developed with Trade Ideas make it simple to identify these stocks.

My Surging Up scanners show me where the market’s highest relative volume is right away. I merely analyze scanner alerts to determine which stocks are strong at any particular time of day.

I search for patterns that promote continuing momentum as a pattern-oriented trader. Scanners alone discover patterns on charts themselves. This is where the trader’s ability to rationalize each trade comes into the equation.

Momentum Day Trading Strategies Pattern #1: Bull Flags

Bull flag breakout pattern

My entry is the first candle to make a new high after the breakout in the Bull Flag Pattern. So, we can check for stocks that are expanding up, creating the tall green candles of the Bull Flag, and then wait for 2-3 red candles to create a pullback.

My entry is the first green candle to make a new high following the pullback, with my stop at the pullback’s low. Generally, the volume will increase when the first candle sets a new high. That is the hundreds of thousands of retail traders taking positions and placing their buying orders.

Momentum Day Trading Strategies Pattern #2: Flat Top Breakout

Flat top breakout pattern

The flat-top breakout pattern is similar to the bull flag pattern, other than that the pullback normally has a flat top where there is a heavy level of resistance, as the name implies. This normally happens over a few candles, and the obvious flat top pattern on a chart will make it easy to spot it.

This pattern generally occurs when there is a large seller or sellers at a certain price level, requiring buyers to purchase all of the shares before prices may continue to rise. When short sellers spot this resistance level building, they will place a stop order right above it, which can result in an explosive breakout.

When buyers breakthrough into the resistance level, all buy halt orders will then be activated, leading the stock to rapidly shoot up, and the longs will be resting on some big profits when this happens.

Most Profitable Trading Strategy in 2022

All the three strategies outlined above share some common characteristics that make them one of the top choices for generating consistent profits this year. In my analysis, I came across the following important areas that weighed in the selection:

  • They are not focused solely on the strength or weakness of the trend: The strategies try to help us capitalize on the strength of the price action change, rather than following the trend blindly. For instance, the Williams %R strategy (strategy 1) informs you to check the length of the candlesticks to gauge the robustness of the momentum behind the price change. 
  • Applicable in a wide range of markets: You can apply strategy 1 and strategy 2 for a wide range of markets, including cryptocurrencies and forex pairs. The third forex momentum trading strategy is specially adapted to trading stocks and takes advantage of one-time events. 
  • Simplicity and applicable everywhere: You don’t need an advanced trading interface such as MetaTrader4 or third-party indicators to apply the following strategies. The most profitable strategy in 2021 needs to be simple enough. 
  • Setting stop loss and take profit levels: A strategy should not only allow you to capitalize on market movements, but it also needs to have a robust risk management system. The three curated forex momentum strategies all share this feature and will be vital to increasing profitability in 2021.

Before implementing a strategy with real money, it’s always essential to test it out on a demo account. There’s always room to tweak and fine-tune the strategy by diving deeper into the technical indicators used. For instance, you can take a deeper look into the use of moving averages when implementing strategy 2: the Stochastic and MACD Trading System.

Real Life Momentum Day Trading Strategy Examples

Real Life Momentum Day Trading Strategy Examples

An example of a bull flag breakout is seen above. As you can see, we had a strong start on high relative volume, followed by a period of consolidation on the low volume before breaking out again. These patterns appear on a daily basis, therefore mastering how to trade them is crucial to making money!

Real Life Momentum Day Trading Strategy Examples 2

This is another bull flag pattern that turned out wonderfully, and as you can see, it had the same traits as the previous bull flag pattern above. We had a nice starting drive with good volume, which was followed by a low volume pullback before the breakout.

Risk Management 101: Where to Set My Stop

I normally place a tight stop order right below the initial pullback when buying momentum stocks. If the stop is more than 20 cents away, I may choose to stop out at minus 20 cents and try again a second time later. Because I always want to trade with a 2:1 profit loss ratio, I normally employ a 20-cent stop. To put it another way, if I risk 20 cents, it’s because I have the ability to make 40 cents or more, which implies that I’ll need to make $1.00 or more to justify the transaction.

I aim to stay away from trades that require a high profit to justify the trade. When I use a 20-cent stop and a 40-cent objective instead of a 1.00 stop and a 2.00 profit target, I’m considerably more likely to succeed.

Risk Management 101: Where to Set My Stop

When I trade, I aim to diversify my portfolio risk over all of my trades. The distance between my entry and stop prices is the greatest approach to measure risk. I’ll take 2,500 shares (2,500 x.20 = 500) if my stop is 20 cents and my maximum risk is $500.

The Best Time of Day to Trade 

The Momentum Trading Strategies can be employed from 9:30 a.m. to 4:00 p.m., but I find that morning is the most ideal time to trade, the first hour at any given time when the market opens, to be precise. I normally focus my trading from 9:30 a.m. to 11:30 a.m. Nevertheless, a news spike can occur at any point during the day, resulting in a massive increase in volume in a stock.

This stock, which was previously of no use, is now a great choice for trading on the first pullback. Typically, the first pullback will be in the form of a bull flag. After 11:30 a.m., I exclusively trade off the 5-minute chart. During the mid-day and afternoon trading hours, the 1-min chart becomes overly turbulent.

Entry Checklist Summary

Entry Criteria #1: Day Trading Chart Pattern with Momentum (Bull Flag or Flat Top Breakout)

Entry Criteria #2: You’ve got a tight stop that offers a profit-to-loss ratio of 2:1.

Entry Criteria #3: You have a high relative volume (2x or more), which is ideally associated with a catalyst. A larger volume indicates that far more people are watching.

Entry Criteria #4: Low float is recommended. I prefer under 100 million shares, but less than 20 million is optimal. Trade Ideas or eSignal can help you identify the remaining float.

Exit Indicators

Exit Indicator #1: When I reach my first profit target, I will sell 1/2. If I’m risking $100 to make $200, I’ll sell half once I’ve made $200. On the balance of my position, I adjust my stop to my entry price.

Exit Indicator #2: The first candle to close red is an exit indicator if I have not yet sold 1/2. I’ll hold through red candles if I’ve already sold 1/2, as long as my breakeven stop does not occur at all.

Exit Indicator #3: The extension bar prompts me to start locking in profits before the inevitable reversal. An extension bar is a candle that shoots up, putting me up to $200-400 or more right away. Whenever I get fortunate and stock spikes up while I’m holding it, I sell it.

Analyze Your Trading Results

Positive trading metrics will be present in all successful traders. Trading is a statistically based profession. You either have statistics that generate profits or statistics that generate losses. When I deal with students, I look at their profit loss ratios (average winners vs average losers) as well as their success rates. 

Without even looking at their entire P/L, this will tell me if they have the ability to be profitable. You must review your performance on a weekly basis to comprehend your current trade metrics.

The greatest traders keep thorough trading records because they are aware that they can utilize data mining to figure out what and where they need to do to enhance their trading. Tradervue has been a big help in keeping track of my trading numbers as well as in fine-tuning my strategies.

Want to Keep Learning? I Teach ALL my Momentum Day Trading Strategies in our Day Trade Courses

You will study all the specifics of this trading method in our Day Trading and Swing Trading Courses. You’ll get live alerts when I call out my positions and stop in our Day Trading Chat Room. I like to get in on the first or second pull back when I notice a stock with a lot of volumes. Pullbacks should mimic a Breakout Chart Pattern like Bull Flags or Flat Tops.

In the first two hours of the market, I am a very active trader, and then I start to slow down. In the afternoons, I normally don’t trade. Stocks that are eligible for the Momentum Trading Strategies on the Surging up Scanners can be traded as early as 9:31.

At times, a stock that was not gapping up but was already on my radar for a Gap and Go! A Momentum Trade will benefit from the strategy trade’s spike in volume out of the gate. These stocks could be a sympathy bet for another strong stock or sector, or they could be undergoing a technical breakout.

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I hope you liked my selection of Top 3 Best Momentum Trading Strategies and you will get a good experience in trading.

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About the author Freddie North

  • Personally, I wouldn’t call this strategy my favorite. I think it has some potential but needs improvement. The author did not consider the distance between the bands. I prefer momentum trading with the Williams %R indicator.

  • I think it’s a great choice. It shows breakout, trend, ranging market, etc. That guy John Bollinger knew something about volatility. This strategy works like a charm for me, but I also like the Stochastic and MACD combo.

    • This approach was originally developed for the market of binary options, but it may be applied to currencies and combined with the Momentum indicator. For this momentum trading strategy, you need a timeframe of 15 minutes, this should give you enough trades during the day. There is also less noise than on a 1- or 5-minute chart. You know you should not enter when the bands are very close to one another.

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