Momentum Trading can be one of the hardest, but most rewarding strategies. For the short-term trader (and since it is traditionally used for intra-day trading), trading based on momentum indicators can be very volatile, as momentum itself is a volatile indicator. By this, we mean it moves up, down, down, and then back up incessantly to the point where one must remain steadfast in their goals, focus, and personal system for trading.
To help you better use momentum for trading, we have produced this article to help refine your entry and exit points this way no trade decisions are made based on an impulsive reaction to momentun fluctuations.
Entry Techniques
First, determine if the overall market is bullish or bearish. Do this by combining an exponential moving average (EMA) with a MACD histogram (an oscillator). Since we want to determine a long-term trend to see the state of the market before anything else, you can use a 24-week EMA with a weekly MACD histogram chart.
To determine if the market is bullish, look for the EMA to rise together with the MACD histogram. If they are both downtrending together, this is a bearish market. If the EMA and MACD oscillator diverge, it is a bearish sign as well. Yes, positive divergence is considered divergence - this can be the one time it is a negative indicator!
Once the long-term trend is established by the techniques from the above, the next step is to use your regular trading analysis on daily charts. Wait for the appropriate signal that is in the direction of the long-term trend that you just figured out, then trade away!
Another technique for entry after establishing the long-term trend, is to remain using the EMA with the MACD histogram. Except this time, use the technical indicators on a daily chart. A 14-day EMA should suffice. Similar to how you established your long-term trend, wait for buy and sell signals the same way. If the EMA and MACD histogram move upward together - buy. Downward together or diverge - sell.
Exit Techniques
As mentioned in the above, establish the long-term trend. Exiting a position occurs after the position is bought. So naturally, you will wait for the EMA and the MACD histogram to rise together on a weekly chart.
Switch over to a daily chart and wait for a buy signal. Once bought, wait for either indicator to turn down, then exit immediately. This may not be a 100% accurate sell signal, but as an educated trader, the birth of market weakness should be enough for the trader to exit. You can wait for both indicators to begin moving downward together, but at this point, the market would already be on its way down.
If shorting a stock (or basically making money on an assets decline by buying when it is at its low which is a discounted price), wait for either of the indicators to stop generating a sell signal, then cover your shorts.
Conclusion
This system that we have given you here is not our own. It was developed by Dr. Alexander Elder for exiting and entering when trading on momentum. As you can see, the power is in the eyes of the observer. Remain disciplined in your trading, and you shall succeed (Bad human emotion!)
All the best,
AccuInvestor
