Wednesday, 23 September 2009

Momentum Trading Using The 5 Minute Charts

Momentum Trading Using The 5 Minute Charts
Momentum trading is a style of trading that's popular with all kinds of traders because it is so effective in so many different time frames. It is based on the fact that once a price starts moving strongly in one direction (often after a quiet period of consolidation) it will carry on moving in that direction, at least in the short-term. So the trick is to jump on board when the price starts moving and get off again when the move runs out of momentum.
So how do you identify these momentum trades?
Well I like to trade the major currency pairs using momentum trades on the 5 minute candlestick charts, particularly at the start of the London trading session between 8.00 and 9.00 (UK time) and also at the start of the US session.
What you do is wait for at least 3 consecutive candles on the 5 minute charts where the body of the candle is very small. Each of these candles represents indecision in the markets because the price keeps closing close to it's opening price. Therefore when a breakout comes it often has a strong momentum behind it so what you are looking for is a succession of small-bodied candles followed by a larger breakout candle.
Then you simply enter a long or short trade (depending on the direction of the breakout) as soon as the breakout candle closes. Your target price should be at least equivalent to the body of the breakout candle, so if the body of the breakout candle is 20 points you will be looking to exit for a 20 point profit or more. (A better strategy would be to close half at 20 and let the other half run). Your stop loss should be 20 points as well in this case, but most of the time this will not be triggered.
To demonstrate let me show you a snapshot of today's EUR/USD price action:

As you can see if you had entered a position at the close of each of these breakout bars represented by the arrows each one would have resulted in a profit. Of course it doesn't always work out as profitable as this but it is still quite a profitable momentum trading method, particularly on the more volatile days.
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