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Become a day trader. Some traders are extremely patient and love to wait for the perfect setup while others are extremely impatient and need to see a move happen quickly or they'll abandon their positions.
These impatient traders make perfect momentum traders because they wait for the market to have enough strength to push a currency in the desired direction and piggyback on the momentum in the hope of an extension move.
However, once the move shows signs of losing strength, an impatient momentum trader will also be the first to jump ship. Therefore, a true momentum strategy needs to have solid exit rules to protect profits while still being able to ride as much of the extension move as possible.
In this article, we'll take a look at strategy that does just that: The five-minute momo trade looks for a momentum or "momo" burst on very short-term five-minute charts. First, traders lay on two indicators, the first of which is the period exponential moving average EMA. The EMA is chosen over the simple moving average because it places higher weight on recent movements, which is needed for fast momentum trades.
The moving average is used to help determine the trend. The second indicator to use is the moving average convergence divergence MACD histogram, which helps us gauge momentum. This strategy waits for a reversal trade but only takes advantage of it when momentum supports the reversal move enough to create a larger extension burst. The position is exited in two separate segments; the first half helps us lock in gains and ensures that we never turn a winner into a loser.
The second half lets us attempt to catch what could become a very large move with no risk because the stop has already been moved to breakeven. Wait for price to cross above the period EMA, then make sure that MACD is either in the process of crossing from negative to positive or has crossed into positive territory no longer than five bars ago.
Go long 10 pips above the period EMA. For an aggressive trade, place a stop at the swing low on the five-minute chart. For a conservative trade, place a stop 20 pips below the period EMA. Sell half of the position at entry plus the amount risked; move the stop on the second half to breakeven. Trail the stop by breakeven or the period EMA minus 15 pips, whichever is higher. Wait for the price to cross below the period EMA; make sure that MACD is either in the process of crossing from positive to negative or has crossed into negative territory within the past five bars.
Go short 10 pips below the period EMA. For an aggressive trade, place a stop at the swing high on a five-minute chart. For a conservative trade, place the stop 20 pips above the period EMA Buy back half of the position at entry minus the amount risked and move the stop on the second half to breakeven. Trail the stop by breakeven or the period EMA plus 15 pips, whichever is lower.
Long Trades Figure 1: Although there were a few instances of the price attempting to move above the period EMA between 1: We waited for the MACD histogram to cross the zero line and when it did, the trade was triggered at 1.
We enter at 1. Our first target was 1. It was triggered approximately two and a half hours later. We exit half of the position and trail the remaining half by the period EMA minus 15 pips. The second half is eventually closed at 1.
The math is a bit more complicated on this one. The stop is at the EMA minus 20 pips or The first target is entry plus the amount risked, or It gets triggered five minutes later. The second half is eventually closed at Although the profit was not as attractive as the first trade, the chart shows a clean and smooth move that indicates that price action conformed well to our rules.
We see the price cross below the period EMA, but the MACD histogram is still positive, so we wait for it to cross below the zero line 25 minutes later. Our trade is then triggered at 0. As a result, we enter at 0. Our stop is the EMA plus 20 pips.
At the time, the EMA was at 0. Our first target is the entry price minus the amount risked, or 0. The target is hit two hours later and the stop on the second half is moved to breakeven.
We then proceed to trail the second half of the position by the period EMA plus 15 pips. The second half is then closed at 0. In the chart below, the price crosses below the period EMA and we wait for 10 minutes for the MACD histogram to move into negative territory, thereby triggering our entry order at 1. Based on the rules above, as soon as the trade is triggered, we put our stop at the EMA plus 20 pips or 1.
Our first target is the entry price minus the amount risked, or 1. It gets triggered shortly thereafter. The second half of the position is eventually closed at 1. Coincidently enough, the trade was also closed at the exact moment when the MACD histogram flipped into positive territory.
However, it does not always work and it is important to explore an example of where it fails and to understand why this happens. In Figure 5, the price crosses below the period EMA and we wait for 20 minutes for the MACD histogram to move into negative territory, putting our entry order at 1.
We place our stop at the EMA plus 20 pips or 1. Our first target is the entry price minus the amount risked or 1. The price trades down to a low of 1. It then proceeds to reverse course, eventually hitting our stop, causing a total trade loss of 30 pips.
When trading the five-minute momo strategy, the most important thing to be wary of is trading ranges that are too tight or too wide. In quiet trading hours where the price simply fluctuates around the EMA, the MACD histogram may flip back and forth causing many false signals. Alternatively, if this strategy is implemented in a currency paid with a trading range that is too wide, the stop might be hit before the target is triggered.
Conclusion The five-minute momo trade allows traders to profit on short bursts of momentum, while also providing the solid exit rules required to protect profits.
Learn a strategy with clear entry and exit levels that will get you into a trend at the right time. This type of strategy demands controlled decision-making, requiring a continual refinement of entry and exit techniques.
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