If you want to learn about forex momentum trading, you’ve come to the right place.
In this post I will show you the two simple momentum trading techniques so that you can become a better momentum trader.
I think every forex trader should have some level of knowledge about momentum trading because it does really help you make the right trading decision to some extent on whether to buy or sell or not.
Don’t forget to share, like, tweet, link at the end if you enjoy it.
Table Of Contents
- Momentum Trading Definition
- Price Action Momentum
- How To Read Candlestick Momentum
- In Forex, Momentum Is A Product Of Time And Price
- 2 Simple Ways To Predict Price Action Momentum
- Momentum Trading Examples
- Advantages Of Momentum Trading
- Disadvantages of Momentum Trading
- Momentum Trading Strategies Resources
Momentum Trading Definition
What Is Momentum Trading? Momentum trading is when you are involved in trading the acceleration of price in a strong trending market.
Let me sidetrack for a bit here and explain how the trading world has adapted this word called momentum into its vocabulary.
In physics (a branch of science that deals with matter and its motion), momentum is described as a product of mass and its velocity:
Based on this equation, momentum increases when either the mass or the velocity increases and if you were to plot it on a graphs, it would look like this:
Example 1: Fixed mass, increasing Velocity
A car driving downhill without brakes is an example of a fixed mass and its velocity is increasing as it heads downhill.
So the steeper the slope is, the velocity is going to increase and therefore its momentum.
So the car’s momentum will be different on each section of the downhill road because its speed is increasing all the time.
Only when the road starts to level off, then the velocity of the car starts to decrease and therefore the momentum starts to decrease as well.
The car will only come to a stop when its velocity is zero and this happens because of the friction between its wheels and the road surface.
Example 2: Increasing mass, Constant Velocity
A snow has a snowball effect when it rolls downhill, which means it starts small but its mass starts to increase as it picks up more snow along the way as it rolls down.
Now, this same principle of a car without brakes or a snow having a snowball effect down a hill is what momentum trading in forex, stock market or commodities market is like.
A good momentum trader is the one that is always looking for, figuratively speaking: the car that is going to have a brake fail when travelling downhill so that he can ride downhill as fast as he could in the shortest amount of time.
So ideally, the best momentum trading strategies would be the strategies that allows the momentum trader to enter a trade before the momentum actually happens.
In that way, you capture most of the momentum from the very beginning and watch your profits increase…quickly.
But then, there are momentum traders that would also like to jump in after that momentum is confirmed. The problem with this trading approach is the fact that you would miss out on the first part of the price momentum.
Now, lets dig deeper…
Price Action Momentum
Now, there are different ways traders like to trade momentum and the two main ways are:
- by forex indicators
- by using price action
For me, I prefer using price action. So in this article, I will be focusing mainly on how you can learn to trade momentum using price action.
So what actually is price action momentum?
Well, the foundation of price action momentum is the candlestick (or bar if you like bar charts).
In a candlestick, you have all the information you need about price action momentum.
So how do you see momentum in a candlestick? Well, you need two things:
- the length of the candlestick (how long a candlestick is)
- and the opening and closing prices.
How To Read Candlestick Momentum
Here’s are a few facts:
- every candlestick you see on your charts, from the 1 minute timeframe up to the monthly timeframe tells you a story about momentum.
- every candlestick tells you a story as to who was winning the battle between bulls and bears.
When a candlestick closes, it gives you all these 4 information instantly:
- opening price
- closing price
- lowest price
- highest price
From these information, you can work out a few other information as well:
- a candlestick is bullish when the closing price is higher than the opening price. It simply means that the buyers were in charge in that period.
- for a bearish candlestick, the the closing price is lower than the opening price which means price fell which means sellers were in charge during that period and drove down the price.
So does this information about candlestick tell you anything about momentum yet?
Nope…well, kind of, but not fully. I will explain.
In Forex, Momentum Is A Product Of Time And Price
In forex, momentum trading is about time and price. In physics, its about velocity and mass.
In simple terms:
- an increase in momentum happens when price increase (or decreases) very quickly in a short period of time.
In order to understand this time and price concept of momentum trading, you need one thing: the candlestick.
Let’s have a look at these two candlesticks below and lets assume that both of these candlesticks were formed in exactly that same time, let say that they are 1 hr candlesticks.
Now tell me, which one of these candlestick has more momentum? Candlestick 1 or candlestick 2?
If you said candlestick 2, then you are right.
Let’s analyze each of these two candlesticks to really see what happened here.
- Candlestick 2 from opening, never made a low (which would mean that the bears were in control during the early stages) and never made a high which means that the closing price=highest price which simply means that bulls where in control of this candlestick from the opening price to the closing price.
- the fact that there were no candlestick wicks on either end of this candlestick meant that the bulls were in control from start to finish during this time the candlestick was forming until the end. The bears were simply helpless and this was a really strong bullish momentum candlestick.
- candlestick 1 on the other hand, after opening, it made a low, which meant that bears took control for a while and then after that, the bulls took control and drove the price up all the way to the highest price and then bears took a bit of control again by driving the price down a bit to the closing price but not sufficient enough to have a closing price below the opening price which would have made this a bearish candlestick.
- the fact that candlestick 1 has the same candlestick length as candlestick 2 means that they both traveled the same price range in that timeframe but the fact is, candlestick 1 has a shorter “body” length compared to the candlestick makes candlestick 1 not a strong bullish momentum candlestick.
Here’s are few examples of candlesticks showing different levels of momentum:
A general rule of thumb is this:
If you see a candlestick continue to lose its momentum and pulls back to 50% of its range, then you can start to consider the Bulls or Bears may be losing their battle in that particular timeframe where that candlestick was formed:
2 Simple Ways To Predict Price Action Momentum
These are the 2 simple ways to predict where price action momentum is going to increase or decrease:
- you need to know where price action momentum can happen
- you need to know the signs or the price action signals that indicate that momentum be increasing or slowing down.
Can you predict with 100% accuracy that the next candlestick is going to be an explosive momentum candlestick?
No, you can’t.
But based on price action trading and history of what price tends to do on certain places on the chart, you do have something to work with.
I will talk about each of the two ways below…
1: Where Momentum Happens
Well, this is not rocket science it is the same old things you know already:
Sound’s boring right?
You thought that you were going to get something secret here about momentum trading but are feeling disappointed because I’m pointing you back to what you already know?
2: Momentum Trading Signs
You also need to know what kind of momentum signs that you need to look for as price heads to these price levels mentioned above.
In order to do that, you need to know:
- decreasing bullish momentum signals
- and decreasing bearish momentum signals
Decreasing Bullish Momentum
If price is heading up to a major resistance level, one of the very first signs you tend to see would be signs of decreasing bullish momentum.
What this means is that bullish candlestick bodies will start to get shorter, like this:
When you see this happening:
- you should really take note of that
- and start preparing to sell, or go short in other words.
- or if you have a buy trade that is in profit, now would be the time to move your stop loss tighter or take some profits off the table and move your trailing stop tighter for the remaining lots or otherwise, exit your trade.
Decreasing Bearish Momentum
In a downtrend, when price heads down to a support level, what you tend to see is a decreasing bearish momentum. What happens is that the bearish candlesticks get shorter in length as they come to that support level and you will tend to see something like this:
When you see this decreasing bearish momentum, you should:
- take notice and prepare to look for for an opportunity to buy or
- if you have sell trade that is in profit, now would be the time to exit the trade or move your stop loss tighter or take some profits off the table and move the trailing stop tighter for the remaining contracts you have in play.
- or you can decide to exit all your trades completely and walk away with what profits you’ve made so far.
Momentum Trading Examples
Here are some charts that I’ve gone through from the past to show you examples of momentum trading in action:
Here’s another one:
Advantages Of Momentum Trading
- if you get into a trade at the right time, you can make big profits in a very short period of time because of the momentum factor-price travels quickly in a very short period of time.
- allows you to be on the winning side…for example, if the bears are winning, you want to be selling. Or if the bulls are winning, you want to be buying.
Disadvantages of Momentum Trading
- the theory or the concept part may be easy to read and understand but the implemention on real live trading may be difficult for new forex traders
- momentum trading is not the forex holy grail, there will be false price moves that will make you lose and it is just one part of the many trading techniques and strategies which you can apply in forex trading and as always, everything has it weaknesses.
Momentum Trading Strategies Resources
The following systems are really good momentum trading strategies which you can apply what you learnt here with momentum trading on them:
- trendline trading strategy
- support and resistance trading strategy
- horizontal channel trading strategy
- diagonal channel trading strategy
Also check out 4 Confluence Trading Price Action techniques which can be used with momentum trading…
You should also know such information about candlesticks like these shown below and then apply them to the momentum trading concepts you learn on this post:
You just have to think outside of the box a little bit here and think of ways and technique on how you can use this momentum trading information and apply them to the many forex trading strategies you can find on this site.
Momentum trading in forex is about how fast (or slow) price moves in a given amount of time and looking for ways on how to be able to capture that price move in order to make profits.
The fast price moves in a given amount of time the better and this is what gets momentum traders excited.
No momentum trader likes to trade a slow moving market (less momentum) and apart from using other forex indicators to predict momentum, price action by the use of candlesticks charts is a really good way of figuring out momentum trading potential areas on your charts.
To predict price action momentum:
- you need to know where price action momentum can happen and the places that this can happen are support and resistance levels, Fibonacci levels, confluence levels, pivots etc.
- you need to know the signs or the price action signals that indicate that momentum be be increasing or slowing down and the most basic element is the candlestick.
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