Momentum trading is a frequently utilized trading strategy mainly used in Forex, CFD, and stock trading. Momentum trading meaning is a strategy based on the velocity of the price movements which determines to enter and exit the positions. The price movement that the strategy emphasizes is quite similar to the term that we encounter in physics.
Momentum is a result of the multiplication of mass by velocity which describes how likely is the object to continue on the provided path. To apply this concept to Forex trading, regard the two variables used in the equation to be trading volume and price change rates. Hence, if the price movement in a specific direction is strong enough, it is expected to stay so until the trend begins to lose momentum.
There are numerous technical indicators that momentum traders use for measuring the trend and likelihood of the asset remaining in the same direction. For instance, the indicators measure the price change rate of a given currency pair or describe a probable retracement or reversal, suggest approximately how long the trend is expected to continue, etc. There are dozens of momentum trading indicators but not all of them are supported on systems available globally. Only a few systems are capable of offering proprietary indicators, manual trading options, and proper monitoring and support.
In this article, we will cover the absolute best systems for momentum trading including the fully automated and semi-automated options. We will recommend alternatives according to the trading capital available, the complexity of the systems, profitability rate, risk/reward ratio, monthly returns, and much more. Furthermore, we will provide the background information on each system along with its origins, a number of satisfied users, pricing, specifications, and other details that momentum traders might find crucial to know.
There can be various customized strategies for momentum trading, however, the two main categories stand out – relative and absolute strategies. While absolute momentum trading strategy is much more frequent among Forex traders, relative strategy has also got a significant increase in followers recently. Relative momentum trading strategy means comparing the performance of specific currency pairs and making decisions based on it.
Hence, traders would be buying the well-performing pairs and selling the poorer ones. On the other hand, absolute momentum trading strategy will measure the performance of a single pair and compare it against the past performance data – in historical time series.
The choice can also be made in accordance with the position length of trade. For instance, traders can choose between a short term momentum trading strategy and a long-term one. In this situation, traders will need to assess the strength of a trend to estimate how long it will hold. For instance, day traders and scalpers would be looking for momentum strategies for shorter time frames, while position traders will obviously seek long-term ones.
While most of the time both short-term and long-term momentum traders will use the same technical indicators, there are certain specifications to each of them that are way more useful for one of these two strategies. We will cover the importance and usefulness of each common technical indicator in greater detail below.
Factors for Momentum Trading
Momentum indicators are regarded as essential components of momentum strategies. But how do you identify which ones you need to use most frequently based on your strategy, type of financial instrument, or even trading capital? Well, before we move on listing and explaining the indicators, let’s assess the factors defining momentum. Those are volume, volatility, and timeframe.
Volume measures the trading amount of the given currency pair within a certain time period. The volume factor is crucial because Forex traders need to open and close positions in an instant on the market. High volumes appear when the concentration of the buyers and sellers is high thus resulting in higher market volatility.
Volatility on the other hand is a degree to which the price of an asset changes or fluctuates in a given time frame. In momentum trading strategy Forex, it is important for day traders and scalpers to target highly volatile currency pairs and observe the assets that offer short-term significant price movements. However, we recommend that traders keep in mind risk management strategies to avoid massive losses in highly volatile markets.
The timeframe is another significant factor that in fact determines the strategy of the trader. For instance, the short-term strategy traders will still need to assess the strength of a certain trend and to forecast how long it will keep the same direction. If the trend is expected to intensify further then they might decide to enter the position later. On the other hand, long-term traders will get involved in position trading with appropriate strategies targeting days or weeks-long strategies and fairly stable assets.
Best Momentum Indicator Options
Technical indicators work closely with the factors that we explained above. Depending on your trading strategy you might differentiate across several indicators, however, there are some that are universal across all platforms no matter the strategy option. We will discuss the most popular indicators one by one providing insight into how they are utilized and what significance they carry for the Forex momentum traders.
- Relative Strength Index (RSI) – you will encounter this index most frequently on the popular automated or manual trading platforms. It is one of the major price movement strength measures within a specific time period. It is used to quantify the relative strength of a current trend against the previous performance
- Moving Averages – it has several usages in different trading strategies, however, mainly is beneficial as it smoothes out erratic price movements that appear on the price charts in order to fully picture the overall trend of asset pricing. There are three types of moving averages that traders commonly implement – SMA (simple moving averages), EMA (exponential moving averages), and MACD (moving average convergence divergence).
SMA is an arithmetic average of price movement which has a simple formula – summing up the recent prices and dividing the result by the time frame of the given calculation average. EMA differs from simple averages in a way that concentrates more on the importance of recent price figures. It is a type of weighted moving average. MACD, on the other hand, is an indicator used to reveal changes in strength, momentum, direction, as well as the asset price trend. Usually, MACD is used for trading with the most volatile and the best stocks for momentum trading.
- Commodity Channel Index (CCI) – CCI uses a simple moving average (SMA) and mean deviation from the asset’s average price. It compares these two data against the usual price of a currency pair including its average, high, low, open, and close figures. The most frequent application of the indicator is identifying oversold and overbought positions. You can identify market conditions in the following way: overbought conditions will read above 100, whereas oversold conditions will be below 100.
- On Balance Volume (OBV) – this indicator is not available on all trading platforms and mainly advanced traders are utilizing it as a technical indicator of momentum trading. The OBV uses volume changes to predict the price of an asset. Another use of the indicator in momentum trading algorithm is its analysis of the sentiment of the traders’ community which then produces predictions for a bullish or bearish outcome. Traders can use OBV to compare the relative action of OBV generated data against the price bars, which produce more actionable signals.
- Stochastics – stochastics indicator works best with specified time frames. Within a period it compares the current market price of a currency pair against its price range. Using a stochastics indicator, traders can identify the upward and downward price momentums of any given currency pair, or stock. It serves as one of the simplest, yet useful Forex indicators across a great majority of the platforms. The indicator below 20 means the upward price momentum, whereas the above 80 indicator shows the downward price momentum.
- Average Directional Index (ADX) – ADX is one of the underrated momentum trading indicators which is known to more advanced or upper-intermediate traders’ communities. It is a pure trend strength measuring indicator using positive (+DI) and negative (-DI) directional indicators along with the main indicator of the trendline. There are several main outcomes that the tool can display which are 25+ ADX, -20 ADX, or non-trending. If the indicator shows above 25, it means that there is a strong price trend. If it indicates below 20 then the trend is very weak or is absent at all. Non-trending usually means that price is going through extreme volatility without a clear direction present or is changing the trend.
- Stochastic Momentum Index (SMI) – SMI is the more sophisticated and upgraded version of another common indicator – The stochastic Oscillator. SMI displays the comparative data of the distance from a current closing price of a stock, currency pair, or another asset relating to the median of either the high or low range of the price. This indicator is highly valued by professional traders since it offers fewer false swings and works equally well for both trendy and nearly trendless assets.
Black Widow Trading System
The Black Widow is the pinnacle of semi-automated trading.
It is the intraday trading strategy based on our own custom made and algo based indicators.
The calculations which are derived from the three most important things in intraday trading are hardcoded into the system and indicators themselves. We use momentum and the zone to pinpoint the trading direction and entries.
The Black Widow is not based on the risk to reward ratio but rather a high accuracy which is in my opinion much more important for intraday trading.
In the past, we struggled with risk to reward due to big fluctuations in the market and it was a bit hard to make consistent profits.
Nowadays, however, things have changed and with the Black Widow, you should take exactly what the market is willing to give you, without thinking twice.
The approach in the Black Widow has been derived from the best proprietary tools and market structures which have also been described in the Mark Douglas book “Trading in the Zone”.
The Black Widow method is a premium and exclusive trading approach developed in full compliance with UK Forex Award winner Nenad’s principles (Nenad Kerkez aka. Tarantula), hence it is not surprising to observe the respective pricing of the product. The traders can purchase lifetime access to the Black Widow for 999 euros. Furthermore, the plan comes with numerous benefits including free Telegram services
If pricing is not convenient for the users, they can still purchase individual proprietary indicators : Xe.camilla.PRO for 110 euros and atr.PRO for 99 euros
Cheers and trade safe,