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Tuesday, June 08 2021
The Mighty Mo!
Ask any student of history about the Mighty Mo and they will tell you about the Missouri battleship (BB-63). It was one of the last battleship built by the United States; commissioned in 1940 , fought with distinction in WWII, Korea and the Persian Gulf, the Japanese Surrender was signed on its deck, and currently resides as a museum at Pearl Harbor where a 100,000 folks visit it every year. So what does a battleship have to do with trading? Only that markets, like battleships, build up momentum and can be hard to turn.
Lets talk a little bit about the mighty mo of trading – Momentum! If “the trend is your friend” then momentum is your “BFF”. If you are able to join the two you can really stack up the points.
First let us understand what momentum is in market price action. Momentum occurs when the price moves in a particular direction (long or short) in a non-relenting way. The price movement has a constant motion in one direction with very little retracement or pullback on previous price action. When using a momentum strategy, you still need to decide on entry, stop and gain using all of the foundations of PSR (Position, Situational Awareness, Risk Management). You may need to shorten the time frame to view the price action. By way of illustration let’s say that a market makes a move of 15 points. The rate of change will be much different if that move occurs over 2 hours than if it occurs in 15 minutes. If you are trading and see the trend developing over the long period you could probably be equally successful using 5, 10 or 15 minute candlesticks. But, if the change occurs in 15 minutes then these time frames are way to slow to get a good position on the trade. For a momentum trade you need to get granular with the price action. To do this I like to change to a 2 or 3 minute chart (sometimes a 820 tick chart is also helpful). This allows you to see the retracements when they occur. If your candlestick paints over 15 minutes you may have 2 retracements in that time frame but you will never be able to see them occur. All of the same tools apply at the shortened time frames they just react faster. Bollinger Bands, EMA’s, ATR, RSI, Donchain, Fibonacci retracements and others are all great tools to help you understand when and where to get into the trade. You are still looking for a good pullback to give you position, you still need situational awareness to decide when to get in and you still need the right risk levels to achieve long term profitability (PSR!) The only thing I have seen as a difference between momentum trades and “normal” turnaround trades is that the retracements in momentum trades are typically shallower (25-30% is common).
What are the signs that it may be time to employ a momentum strategy? I almost always start with a 5 minute chart. There are a few things that I look for and when I see momentum building, I immediately drop to a 2 or 3 minute chart. The first and easiest sign to see is that the 5 minute candles have small tails (away from the direction of PA movement).
If I see 2 candles in a row like above, I start to look for other signs.
If 1 or 2 of these is true then drop to a shorter duration chart and start evaluating the trade.
If they are still true at the faster candle speed then I’ll put on the Fibonacci retracement tool and look for a 30% retracement from the last turnaround on that faster scale. Many times I will put a Limit Order in at 30% and sometimes another at the 50% (DCA). Pick a risk level that will give the trade room to “breathe” and not hit your stop to quickly. Momentum trades can take you for quite a ride; have a strategy to get as much out of the trade as you reasonably can and be ready to bail out if the momentum dissipates. If the trend is with you and your BFF Mo is working for you, you should do well. This is a fun trade when you get it right, so enjoy.
Finally, this is not the way to trade for beginners. If you are new to trading, get a good strong base of basic trades under your belt before you attempt anything like this. Your track record will tell you when it is time to “SIM” momentum trades.
Happy Trading and Trade Well at FNL!
Jeff B, GA