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Top 3 Best Momentum Trading Strategy

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Table Of Contents

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.

Forex trading strategies

Strategy №1

Implementing the best momentum forex trading strategy can be the ideal way to build and manage your trading account. Our team at Trading Strategy Guides believes that a momentum indicator strategy can reduce risk. It can also enhance your overall returns. We featured this strategy in our comprehensive guide for the best trading strategies we have discovered. If you don’t know What is forex, read here

Momentum trading is a very hot topic in trading. According to the efficient market hypothesis, it shouldn’t exist. But its effects are widespread and it has been used by many Wall Street elites. They have made billions upon billions of dollars in profits.

We are going to review core market principles. The main one is that momentum precedes price. In this sense, a momentum indicator strategy is more like a trend following forex strategy. For a simple yet effective trend following method, we recommend reviewing The Trend Following Trading Strategy.

Before diving into the best top 3 momentum trading strategies, let’s define what momentum indicator trading strategies are:

What is Momentum?

The term momentum was borrowed from Newton’s first law of motion. The law states that 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 reverse. This is the reason why a momentum indicator strategy is so powerful.
Also, read about Fading the momentum in Forex Trading.

So, an instrument that goes up tends to continue going up:

And instruments that are going down tends to continue going down:

Essentially trends tend to continue and we can use momentum to determine when to buy and when to sell. This is because instruments with positive momentum tend to have positive returns in the near future. And vice-versa for those with negative momentum. This is why we have found that momentum is typically the best indicator for swing trading.

There are various explanations for why price momentum occurs. Each bias has its own name and psychological explanation behind it.

The simplest explanation would be that rising prices attract buyers and falling prices attracts sellers. Our best momentum trading strategy is based on this simple explanation.

Pretty simple, right?

Using a momentum indicator strategy, it means we’re going to hold the trade for a short period of time. Anywhere between a few minutes and up to a few days. Basically, the best momentum trading strategy runs until the momentum drys out.

So, we only want to concentrate on the relative strength of any instrument.

Now….

Before we move forward, we must define what technical indicator we need. This will help us select the best momentum trading strategy and how to use it:

There are a variety of different momentum indicators. But the best forex momentum indicator is by far the Williams %R indicator. The best forex momentum indicator will help us identify profitable day trading opportunities.

The best forex momentum indicator is named after legendary trader Larry Williams who invented it. Larry Williams used the best forex momentum indicator to great success. He won millions of dollars in profits.

So, this brings some credibility to the best forex momentum indicator.

The preferred settings for the best forex momentum indicator is 40 periods.

The Williams %R runs on a scale from -100 to zero. A reading in the vicinity of -100 is an indication that the instrument is oversold. This means it’s a potential buying opportunity. Once it reaches zero, that’s an indication of overbought and maybe the time to sell.

Now, let’s see how you can effectively trade with the best momentum trading strategy. You’ll learn how to make profits from using the best forex momentum indicator. We also have training on how to use currency strength for trading success.

Stock trading strategies

The Best Momentum Trading Strategy using the Best Forex Momentum Indicator

Our team at Trading Strategy Guides believes that smart trading is the way to build the best momentum trading strategy. In this regard, we don’t want to predict when the momentum will happen, but we let the market tips his hands and then react.

One principle of the momentum indicator forex strategy is, “buy high to go higher” and “sell low to go lower.” In other words, we trade in the direction of the trend while having the momentum on our side. Also read the hidden secrets of moving average.

Moving forward, we present the buy side rules of the top 3 best stock trading strategies.

Step #1: Define the Trend. An Uptrend is defined by a Series of HH Followed by a Series of HL.

The definition of an uptrend is pretty much standard. In an uptrend, we look for a series of higher highs followed by a series of higher lows. Two HH followed by at least another two HL is enough to define an uptrend.

A higher high is simply a swing high point that is higher than the previous swing high. While a higher low is simply a swing low that is higher than the previous swing low.

All momentum traders know that the trend is our friend. But without momentum behind the trend, we might actually not have any trend.

For active traders, we also look at the actual price action in order to gauge momentum. Besides reading the best forex momentum indicator.

Step #2: In an Uptrend Look for Bold Candlesticks that Close Near the Higher End of the Candlestick .

A technical analysis concept is that you want to use multiple confirmation signs when buying and selling. This will increase the likelihood that’s a high probability trading setup.

In this regard, the momentum stock trading strategies besides using the best Forex momentum indicator, also incorporates the price action.

A practical way to read momentum from a price chart is to simply look at the candlestick length. What we want to see in an uptrend is big, bold bullish candlesticks that close near the higher end of the candlestick.

In the figure above, 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.

Now, it’s time to focus on the Williams %R. This is the best forex momentum indicator. Which brings us to the next step of our momentum indicator strategy.

Step #3: Wait for the best Forex Momentum Indicator to get oversold (below -80). Then rallies above the -50 level before Buying .

We’re going to use Williams %R, the best forex momentum indicator in a smart way. In an uptrend, we buy after the best forex momentum indicator has reached oversold conditions (below -80). And then rallied back above the -50 level.

Now, we have confirmation from both the price and the best forex momentum indicator. The real momentum is behind this trend and the probabilities are in favor of more upside prices from here on.

Note* If the best forex momentum indicator continually stays in overbought territory (above -20 level), it signals a strong momentum and conversely a strong trend. Inversely the same is true in a downtrend.

The next important thing we need to establish is where to place our protective stop loss.

See below…

Step #4: Place Your Protective Stop Loss below the Recent Higher Low.

We want to hide our protective stop loss. It is below the most recent higher low level that formed right before the best momentum trading strategy issue the buy signal.

Alternatively, you can also trail your trading stop loss below each most recent higher low. This day trading strategy will allow you to lock-in the potential profits in case of a sudden market reversal.

Last but not least the momentum indicator forex strategy also needs a place where we need to take profits, which brings us to the last step of the top 3 best momentum trading strategy.

Step #5: Take Profit once we break below the Previous Higher Low

A trend in motion can stay in that state longer than anyone can anticipate. And since we want to maximize our potential profits we let the market tips it hands before liquidating our trades. In this regard, we look for a break in the trend structure. Respectively a break below the most recent higher low.

Alternatively, you can take profit once the best forex momentum indicator breaks below the -50 level.

Note** The above was an example of a BUY trade using the Best Momentum Trading Strategy. Use the same rules for a SELL trade. In the figure below you can see an actual SELL trade example.

Take a look:


source

Best time to trade forex

Strategy №2

Momentum with Stochastic and MACD Trading System

Time frame 60 min, 240, min, daily and weekly.
Currency pairs: any.
Forex Indicators:
MACD (12,26, 9).
Stochastic oscillator (5,3,3) eith 20 and 80 levels.
Trading Rules
Buy
When the histogram is above zero level, the currency is on an uptrend. Then we want it to start declining towards the zero level. After it nears the zero level, we want it to reverse and go up again.
How should we enter a long (buy) trade?
First we need to recognize a turning point on the MACD histogram. This means that the blue histogram bars should be above the zero level, and then it should start declining. Finally, it should reverse and go up again.  After we’ve made sure that conditions are met on the MACD
histogram, we should turn to the Stochastic indicator and see its position: we need it to be on the oversold area (around level 20); we want the two lines to cross each other, and we want the lines to face up. We want at least one of the averages to be below level 20.
Now is the moment we should determine our exact entry point. The moment we see the histogram rise again and the stochastic decrease to
the oversold zone, we need to wait for the candlestick that created this condition to close. As soon as the candlestick is closed, we should enter this trade. Let’s analyze a long trade example:
In this example we can clearly see that the histogram is facing up again and that the Stochastic lines have crossed each other on the oversold level, on their way up.

The histogram is facing up and the stochastic lines have crossed each other on the oversold zone, level 20. There’s a very important point I would like to add. It refers to a situation where the histogram is above level 0 and declines below level 0.   If it happens (i.e., if it declines below level 0), it has to reverse and return immediately above this level on the next bar in order for this to be a valid trade setup. We place the stop loss 1 pip below our base candlestick, which is the candlestick where all the conditions have been met.
For Example:
Here I’ll close the trade in two parts: 80% of the trade will be closed initially, and then I’ll close the remaining 20%. How to trade in forex read here. 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 will move the stop loss to the breakeven point (that is, I’ll change it to the trade’s opening
price). The second profit target is twice the trading stop loss. For example:  If I’ve risked 50 pips my second profit target is 100 pips.
This is a screen shot of target 2:
That’s it…
Our first take profit target is closed successfully in 80% of trades and the second profit target is closed with a profit in 45% of trades. This strategy repeatedly generates impressive returns for me, and I’m sure that once you master it, you will see the difference in your bottom
line as well. It’s the best time to trade forex
Sell
When the histogram is below zero level, the currency is on a downtrend. Then we want it to start declining towards the zero level. After it nears the zero level, we want it to reverse and go up again.
How should we enter a short (sell) trade?
First, we need to recognize a turning point on the MACD histogram. This means that the histogram should be below the zero level, and then
it should start rising. Finally it should reverse and go down again.
After we’ve made sure that conditions are met on the MACD Histogram, we should turn to the Stochastic indicator and see its position: we need it to be on the overbought area (around level 80); we want the two lines to cross each other; and we want the lines to face down.
Now is the moment we should determine our exact entry point. The moment we see the histogram fall again and the Stochastic reach the overbought area; we need to wait for the candlestick that created this
condition to close. As soon as the candlestick is closed, we should enter this short sell
trade.
This is an example of a short sell trade:
We place the stop loss 1 pip above our base candlestick, which is the candlestick where all the conditions have been 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.
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 will move the stop loss to breakeven point (that is, I’ll change it 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.

Strategy №3

Momentum is what day trading is all about.  One of the first things I learned as a beginner trader is that the only way to profit is by finding stocks that are moving.  The good news is that almost every single day there is a stock that will move 20-30% or even more!  This is a fact.

The question is how do we find those stocks before they make the big move.  The biggest realization I made that has led to my success is that the stocks that make the 20-30% moves all share a few technical indicators in common.

Before going any further, let’s step back for a moment and ask ourselves what we require from a momentum day trading strategy.  First of all, we need a stock that is moving.  Stocks that are chopping around sideways are useless.

So the first step for a trader is to find the stocks that are moving. I use stock scanners to find these.  I ONLY trade stocks at extremes.  This means I look for a stock having a once in a year type of event.  The price action associated with this event is almost always the cleanest.

Day Trading Strategies & The Anatomy of Momentum Stocks

Momentum stocks all have a few things in common.  If we scan 5000 stocks asking for only the following criteria to be true, we’ll often have a list of less than 10 stocks each day.  These are the stocks that have the potential to move 20-30%.  These are the stocks I trade to make a living as a trader. How to trade in forex without deposit

Criteria #1: Float of under 100mil shares

Criteria #2: Strong Daily Charts (above the Moving Averages and with no nearby resistance).

Criteria #3: High Relative Volume of at least 2x above average. (This compares the current volume for today to the average volume for this time of day.  These all refer to the standard volume numbers, which are reset every night at midnight.)

Criteria #4: A fundamental catalyst such as a PR, Earnings, FDA Announcement, Activist Investors or some other kind of breaking news.  Stocks can also experience momentum without a fundamental catalyst.  When this happens, it’s called a technical breakout.

Finding Stocks For My Day Trading Strategies

Stocks Scanners allow me to scan the entire market for the types of stocks displaying my criteria for having momentum.  These scanners are the most valuable tools for a day trader (Trade-Ideas Stock Scanner Software).  Once the scanners give me an alert, I then review the candlestick chart and try to get an entry on the first pull back.

Most traders will buy in this same spot, those buyers create a spike in volume and result in a quick price change as the stock moves up.  You job as a beginner trader is to learn to find the entry in real-time.

I have created 3 sets of stock scanners for 3 different types of scanning.  I have my Momentum Day Trading Strategies scanners, my Reversal Trading Strategies Scanners, and my Pre-Market Gapper Scanners.

These 3 scanners give me tons of trade alerts everyday.  Instead of having to manually flip through charts, I can instantly see stocks that are in play.  Stock scanners are what every trader today should be using to find hot stocks, whether it’s penny stocks, small caps, or large caps.

My Favorite Momentum Day Trading Chart Patterns

Bull Flags are my absolute favorite charting pattern, in fact I like them so much I made an entire page dedicated to the Bull Flag Pattern.  This pattern is something we see almost every single day in the market, and it offers low risk entries in strong stocks.

The hard part for many beginner traders is finding these patterns in real-time. These stocks are easy to find using the stock scanners I have developed with Trade Ideas.

My Surging Up scanners immediately shows me where the highest relative volume in the market is.  I simply review scanners alerts to identify the strong stocks at any given time of the day.

As a pattern based trader, I look for patterns that support continued momentum. Scanners alone cannot find patterns on charts. This is where the trader must use their skill to justify each trade.

Momentum Day Trading Strategies Pattern #1: Bull Flags

With the Bull Flag Pattern, my entry is the first candle to make a new high after the breakout.  So we can scan for the stocks squeezing up, forming the tall green candles of the Bull Flag, then wait for 2-3 red candles to form a pullback.

The first green candle to make a new high after the pullback is my entry, with my stop at the low of the pullback.  Typically we’ll see volume spike at the moment the first candle makes a new high.  That is the tens of thousands of retail traders taking positions and sending their buying orders.

Momentum Day Trading Strategies Pattern #2: Flat Top Breakout

The flat top breakout pattern is similar to the bull flag pattern except the pullback typically has, as the name implies, a flat top where there is a strong level of resistance. This usually happens over a period of a few candles and will be easy to recognize on a chart by the obvious flat top pattern.

This pattern usually forms because there is a big seller or sellers at a specific price level which will require buyers to buy up all the shares before prices can continuing higher. This type of pattern can result in a explosive breakout because when short sellers notice this resistance level forming they will put a stop order just above it.

When buyers take the resistance level out, all the buy stop orders will then be triggered causing the stock to shoot up very quickly and the longs will be sitting on some nice profits when it does!

Real Life Momentum Day Trading Strategy Examples

Above is an example of a bull flag breakout. You can see we had a nice opening drive on high relative volume followed up by a consolidation period on low volume that eventually broke out again. These patterns happen everyday so knowing how to trade them is key to making money!

This is another bull flag pattern that worked out perfectly and as you can see it had the same characteristics as the other bull flag pattern above. We had a nice opening drive with decent volume followed by a low volume pullback before a big jump on the breakout.

Risk Management 101: Where to Set My Stop

When I buy momentum stocks I usually set a tight stop order just below the first pull back.  If the stop is further than 20 cents away, I may decide to stop out minus 20 cents and come back for a second try.  The reason I use a 20 cent stop is because I always want to trade with a 2:1 profit loss ratio.  In other words, if I risk 20 cents, it’s because I have the potential to make 40 cents.

If I risk 50 cents or more, it means I need to make 1.00 or more to get the proper profit loss ratio to justify the trade.  I try to avoid trades where I have to generate a large profit to justify the trade.  It’s much easier to achieve success if I have a 20 cent stop and 40 cent target vs a 1.00 stop and a 2.00 profit target.

When I’m trading I try to balance my risk across all trades.  The best way to calculate risk is to look at the distance from my entry price to my stop.  If I have a 20 cent stop and want to keep my max risk to $500 I’ll take 2500 shares (2500 x .20 = 500)

The Best Time of Day to Trade

The Momentum Trading Strategies can be used from 9:30-4pm but I find the mornings are almost always the best time to trade, specifically the first hour the market is open.  I focus my trading from 9:30am – 11:30am.  However, at any time during the day we can get a news spike that will suddenly bring a tremendous amount of volume into a stock.

This stock which was of no interest earlier in the day is now a good candidate to trade on the first pull back.  The first pull back will typically take the form of a bull flag.  After 11:30am I prefer to only trade off the 5-min chart.  The 1-min chart becomes too choppy in the mid-day and afternoon trading hours.

Entry Checklist Summary

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

Entry Criteria #2: You have a tight stop that supports a 2:1 profit loss ratio

Entry Criteria #3: You have high relative volume (2x or higher) and ideally associated with a catalyst.  Heavier volume means more people are watching.

Entry Criteria #4: Low Float is preferred.  I look for under 100mil shares, but under 20million shares is ideal.  You can find the outstanding float with Trade Ideas or eSignal.

Exit Indicators

Exit Indicator #1: I will sell 1/2 when I hit my first profit target.  If I’m risking $100 to make $200, once I’m up $200 I’ll sell 1/2.  I then adjust my stop to my entry price on the balance of my position

Exit Indicator #2: If I haven’t already sold 1/2, the first candle to close red is an exit indicator.  If I’ve already sold 1/2, I’ll hold through red candles as long as my breakeven stop doesn’t hit.

Exit Indicator #3: Extension bar forces me to begin locking in my profits before the inevitable reversal begins.  An extension bar is a candle that spikes up and instantly put me up $2-400 or even more.  When I’m lucky enough to have a stock spike up while I’m holding, I sell into the spike.

Analyze Your Trading Results

All successful traders will have positive trading metrics.  Trading is a career of statistics.  You either have statistics that generate returns or losses.  When I work with students I review their profit loss ratios (average winners vs average losers), and their percentage of success.

This will tell me if they have the potential to be profitable, without even looking at their total P/L.  Once you finish each week you have to analyze your results to understand your current trading metrics.

The best traders keep meticulous trading records because they know they’ll be able to data mine these records in order to understand what they should to to improve their trading. I use Tradervue to monitor my trading stats which has been a huge help in fine tuning my strategies.

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

In our Day Trading & Swing Trading Courses you will learn all the details of this trading strategy. In our Day Trading Chat Room, you will get my live alerts as I call out my positions and stops.  When I see a stock that has extremely high volume I look to get in on the first or second pull back.  Pull backs should take the form of a Breakout Chart Pattern such as Bull Flags or Flat Tops.

I am an extremely active trader in the first 2 hours of the market and then I slow way down.  I usually don’t trade in the afternoons.  Stocks on the Surging up Scanners that are candidates for the Momentum Trading Strategy can be traded as early as 9:31.

Sometimes a stock that wasn’t gapping up and already on my radar for a Gap and Go! Strategy trade will surge with volume out of the gates and come into play for a Momentum Trade. These stocks may have news or may be experiencing a technical breakout or be a sympathy play to another strong stock or sector.

A source

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

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Updated  October, 2020

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