3 ENTRY Techniques using Momentum

Momentum fundamentally measures the battle between the bulls and the bears and gives you an indication of who is winning. It measures the strength of the bulls and the bears. In MetaTrader they are grouped as Oscillators as the indicator readings oscillate between the zones where the bulls are in charge and the zones where the bears are in charge.

There are a number of momentum signals and indicators and we will focus on the most popular ones as available on the MetaTrader 4 trading and charting platform.

Please note:- Only use momentum indicators in a sideways market. A sideways moving market is where the price is not making major new highs or lows that are much higher or lower than the previous ones. Ideally the price must be trading between a recent high and a recent low.

Let’s start with the general information one can obtain from a momentum indicator.

There are:

• The buy and sell zones : Middle line crossovers
• Divergences: Times when the bears or bulls are losing strength or momentum
• Indicator spikes or sharp points
• Trendline violation
• Multiple Momentum line crossovers

3.1 Using Momentum to indentify Buy and sell zones

The general divider in the market is the middle line of the momentum indicator (the 50 line in the example below). When the momentum reading is above the middle line it is in a buy mode and the bulls are in charge and below the middle line it is in a sell mode and the bears are in charge. See below where the light blue area is the sell zone and the orange are the buy zone.

These moves from one zone to the next also provide great entry opportunities. Simply ENTER when the candle closes once it has crossed over the middle line.

3.2 Divergences: Times when the bears or bulls are loosing strength or momentum

When the momentum indicator starts showing different information when compared to the price chart it is regarded as a divergence. The indicator is diverging from the price chart. Generally it shows that price movements are running out of momentum. The bears or bulls are losing strength or momentum.

The chart below show how the price is going up but the momentum indicator is going down (Bearish Divergence). Also shown is an example where the price is going down and the indicator is turning up (Bullish Divergence).

Although divergences normally result in trend reversals please treat them as WARNINGS and use some of the other entry techniques to make an ENTRY into the market.

3.3 Indicator spikes or sharp points

When the momentum reading is in an exceptionally high or low area, the price is trading a long way from the midline in the market. These exceptional readings can not be sustained and often result in turning points. This is based on a concept of price exhaustion. In Forex trading these are levels of profit taking or where the bulls or bears run out of money to sustain the trend.

Below is an example of where the momentum indicator gave quite accurate turning signal warnings based on peaks or sharp points made by the indicator. We used an RSI indicator (Relative strength indicator) with a setting of 4 and level lines at the 10, 50 and 90 levels.

Guideline on how to use these signals:

• Only trade these trades when the indicator is above 85 or below 15 when the spike is made. It is best to wait for some confirmation that the market is turning.
• Trading the close of the candle after the spike is made, reduces risk and provides a nice early entry into the trade.
• Be careful when the next candle is much longer than then the one where the sharp point occurred as it will make your entry very late.

The market moves sideways or gently trends 80% of the time. An aggressive way of trading these trades would be to trade when the momentum reading goes above 90 to 95 and then returns to 70 to 80. Alternatively when it goes below 10 to 5 and returns to 20 to 30. Enter only after the price returns.

Basic technique on How to trade turning points using Momentum

1. 1 Load the RSI indicator (set for 4) on your selected timeframe (Can be used on all time frames)
2. 2 Ensure that the market is trading sideways and not trending
3. 3 Trade in a reasonable volatile time of day (See time of day module)
4. 4 Trade in the opposite direction of the prevailing trend once the indicator has gone further than the 90 or 10 levels AND then returns to the 70 or 30 levels. In other words, only trade once the RSI indicator has returned or reversed from these highly over bought or over sold conditions.
5. 5 Enter stops and targets appropriate to your currency, timeframe and time of day
6. 6 Exit when you receive a signal in the opposite direction of your trade
7. 7 Amend this approach based on your own experience.

Warning: this is a high risk technique which should be practiced very well before being traded live.

3.3 Momentum trendline violations

The momentum indicators measure momentum which is the same as the market sentiment. However the price chart always reflects reality. So the momentum indicator on its own may not be enough to be the main trigger for a transaction. It merely provides the motivation and evidence for a transaction but the main trigger to enter deals comes from the Price chart when trendlines are violated.

We like to use trendline violations by the price as the main trigger to enter transactions (deals). A trendline is nothing more than joining a number of swing lows to produce a support trendline. When using swing highs in the same way it creates a resistance trendline.

Trendlines can also be drawn on the momentum indicator. The bigger the angle of the trendline the more aggressive (less reliable) the trendline becomes.

Often trendlines on the momentum indicator warn us that we should be looking for aggressive trendlines on the price chart.

The main method of ENTRY is:-
When the indicator crosses over a trendline treat it as an early warning and ENTER the transaction once the price moves over its trendline.

3.4 Momentum line crossovers

Some traders find the trendline violations too manual and prefer indicator signals such as the indicator line crossover signals as shown below. You would therefore merely enter each time the %D line crosses over the %K line for the Stochastic indicator.

Settings for the above Stochastic Oscillator