Tag: momentum trading

  • What Is Momentum Trading and How To Start?

    What Is Momentum Trading and How To Start?

    What Is Momentum Trading and How To Start?
    Momentum trading is particularly successful in volatile markets. The main rule is “buy high and sell higher.” 

    To understand what is momentum trading you’ll need to know that this strategy is based on the recent strength of stock price. Traders that practice this trading strategy believe the price of an asset will continue to move in the same direction if there is enough force to push it higher.

    Momentum trading is an aggressive approach to trading. You have to know that before even trying to fully understand what momentum trading is.

    The simple answer to the question: What is momentum trading also can be: It is a simple buying and selling of stocks, for example, based on the recent strength of price trends. We mentioned the force behind the stock price, so let’s explain it more detailed. 

    When the stock goes up and as it reaches the higher price, more and more traders are interested to buy. Their interest is driving the stock price higher and higher. That is the so-called relation between demand and supply. As the number of stocks is the same, meaning the supply is the same, the contest among the traders will increase the stock price. And this price growth will continue with the increasing number of buying in the market. But at some point, some of them will start to evaluate if the stock is worth enough to be sold. If there are enough sellers of that stock, the momentum will change the direction and the stock will go down in price. 

    What is the momentum trading here?

    Momentum trading occurs when traders open their positions after they notice there is a strong trend in stock price. They will close their positions when the trend begins to lose strength. Momentum traders don’t need to wait until the trend hits the top or bottom. Their focus is usually the middle range of the price move which presents the main action in the stock price. This range shows the strong buyers sentiment, everyone would like to buy such a stock that has an upward trend. So, what momentum traders do? They are starting to sell the stock at a higher price.

    In other words, momentum traders will attempt to recognize how strong the trend is in a particular direction. Then, they will open their positions to take benefit of the predicted trend development while the stock price is low enough and close their positions when the trend begins to lose strength but the price is high enough to provide them a profit. Momentum traders intend to use the tendency of other traders to follow the majority and profit from that.

    The principle behind momentum trading is “buy high, sell higher.” So momentum traders will keep winning players among bought stocks but they will sell the stocks that are not. The money earned will be used to buy more stocks that were doing well.

    The essence of momentum trading is to sell the stocks that are dropping but not too much. Previously, the traders must have a confirmation that the change in stock price is real and that will continue in the direction. So the trend must be confirmed. 

    What is momentum trading else? It is an excellent strategy with great results in volatile markets where quick access is important. When it is done correctly, momentum trading could provide potentially large profits. This trading strategy requires an outstanding and quick process of decision making and that’s why this approach can provide traders more profits than some other strategy for the same time spent.

    Risks of this trading strategy

    Momentum trading is risky without a doubt and this can be one of the answers on the question of what is momentum trading. But if traders are careful and monitor the market and trends closely, they’ll be ready to buy and sell the stocks on time. It is very important to notice the main change in trend. If the traders miss them, they may suffer big losses. Entry points and exit points or profit targets are extremely important.

    Momentum traders have to recognize the point when to enter and close their trades, the level where to exit the trade. It is also important to recognize the proper time when to take any action. For example, if the trader closes the declining stock sales in time such will end up with the profit. But if the trader fails to close the sale quickly such a trader will end up in great losses caused by the stock’s decline in value.

    It is very important to notice the stock’s sharp drop in price, sell the stock on time, and avoid a dangerous influence on capital involved in the trade. So, the timing is extremely important in momentum trading. The trader has to be absolutely sure that stock is starting to decline and enter the position promptly to sell it. Otherwise, it can be almost impossible to sell it.

    And to answer the question of what is momentum trading. Momentum trading is set to be a remarkably prosperous strategy but has to be performed perfectly.

    How to start momentum trading?

    Identify the stock you are interested in, choose your momentum trading strategy, but first test it on some demo account. But keep in mind several things.

    As we mentioned above, the volume is crucial to momentum traders, because they have to enter and exit positions promptly. That means there are enough sellers and buyers in the market and the good volume shows the stock market is liquid. Volume is the number of stocks traded in the market, it isn’t the number of all transactions.

    Momentum traders seek volatility because the high volatility provides big swings in stock prices. That is an advantage for momentum traders, these short-term increases and decreases in stock’s value give the traders a chance to profit. Of course, only if they have a good risk management strategy as protection. That means they have to set stop-loss and limit orders.

    As we said, time is important. This strategy is adjusted for short-term market movements, but if the trend keeps its strength longer this strategy is useful for position trading too.

    Momentum trading in the stock markets

    To be successful in momentum trading in stocks you’ll have to follow some rules. You’ll need the protection against big losses. So, you’ll need to trail the stop-loss, that will provide you to ride the trend. Set your rules for classifying the stocks to know which stocks to buy. Buy stocks on the uptrend market. 

    For example, if some stock reaches a 50-week high you should go long. If there are many stocks of that kind, make a selection of best 15 or 20 with the biggest raise during the last 50 weeks. Set a trailing stop-loss at a minimum of 20%. Never trade more than 20 stocks at the same time and distribute 5% of capital to each of them. The saying “never put all eggs in the one basket” is relevant to the momentum trading also.

    Momentum traders are focused on price action and rely on technical analysis and indicators because they need to decide when to enter and exit each trade, as we described above. Favorite momentum indicators among traders are RSI (the relative strength index), the stochastic oscillator, moving average. Of course, you can use any other technical indicator but these are the most popular.

    Bottom line

    To be able to understand what is momentum trading you’ll need to have severe risk management. The stock market is volatile and momentum traders need to notice price fluctuations and price pitfalls in the market.
    Don’t neglect the basic elements that could lead to price changes. Sometimes it is better not to think about the next big rally. Think about profit. It might come even if there is no big rally.
    Carefully pick the stocks to trade, set stop-loss levels, place your entry at the right time, systematically monitor the market to notice possible changes, plan, and set your exits.
    Use protective rules for every trade. Momentum traders will set stop losses to protect their trades from unexpected price reversals. There is no other way to be a successful momentum trader. We hope you have a more clear picture of what is momentum trading.

  • How to create your first trading strategy

    How to create your first trading strategy

    How to create your first trading strategy
    Find how to create your first trading strategy, what to look at and how it differs from investing strategy

    By Guy Avtalyon

    Okay, you want to create your first trading strategy and, to be honest, I understand your dilemma. You would like to be successful and you want to know, what strategy should you choose to nail it.

    Listen, there!

    What is the trading strategy?

    A trading strategy is a set of trading settings that serve the currency trader or stock to determine whether to buy or sell a currency or stock, where to enter and exit the position.  And how much capital they invest in trade, and in doing so, earn a difference in price.  

    The trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets.
    A broker can offer you the opportunity to enter into trades that are multiple times the value of the margin that you place. The market is fluid and you can open a trade or exit from one very quickly, so there is potential to make considerable returns.

    What is the investing strategy?

    The investment strategy is a set of rules, behaviors, or procedures, designed to guide an investor’s selection of an investment portfolio. People have different profit objectives, and their individual skills make different tactics and strategies appropriate.

    To complicated? Wait!!! There are more!

    A trading strategy can be – automated (various robots for trading, etc.) – manual (the vast majority of traders use their own trading system.)

    We would like to show you some of them which are successful. We will give you a brief description of 5 simple strategies that can help you to maximize your profits:

    Swing trading

    You can enter a successful swing trade by timing your trade. Do that when is a breakout after a consolidation.
    What does this mean? A period of consolidation occurs when a currency pair moves in an almost precisely defined price range. A breakout will occur. What really happens is that the values of the currencies “breakout” the resistance level. If you predict the breakout accurately, you’ll profit from that trade.

    A swing trade uses a channel trading strategy. Trades take place between the support and resistance levels of swing highs and swing lows.

     

    Rangebound trading

    Here you will need to identify a currency pair that trades within a certain range. Then, you have to identify the support and resistance levels and then time your trade by taking these movements into account.

    It is likely that there will not be a big difference between the upper and lower prices of the range. Because of this reason, you could trade in one of two ways.

    The first option is to trade within the range which will limit your profits as the price difference is bound to be minimal.

    The second way is to look for a breakout from the range. If this happens, you will have to react quickly. You can make a quick profit, but you can lose out. When you see a “false breakout” be extremely cautious because it may mean the market is moving against you so you’ll end up in losses.

    Position trading

    A position trade is not a short-term trade. It is based on macroeconomic trends. It could run over weeks or months or years. Traders take a long-term position based on an understanding of how inflation or the rate at which an economy is growing, will affect the value of a currency.

    If you want to adopt this strategy, you have to stay stick to two rules. First, do not use much leverage. A maximum of 10:1 is quite good in the forex trading. Secondly, the size should be relatively small. This is because you are thinking that some large movement in the relative price of the currency pair is possible.

    Carry trade

    A carry trade means to enter the trade that could take advantage of the interest rate differential of the two currencies.  That means you will be selling a currency with a low-interest rate and buying one that provides a greater rate of interest. Normally, you would choose a currency pair where the higher interest rate currency will appreciate to the lower interest rate currency.

    Carry trades can be high-risk. They are based on a combination of technical and fundamental analysis.

    Momentum trading

    Well, you have to know that the price constantly lies, but momentum tells the facts.
    At the simplest level, you can use momentum trading when rates are going up, then you should buy and when they are declining, you should sell and maximize your profits in the forex market.

    If you want to implement this strategy, you have to identify the currency pairs that show the greatest momentum and have moved most strongly. It is possible by tracking price movements over a period of several weeks.

    Then trade those pairs that show the greatest momentum.

    What do you need to be successful in trading?

    Let’s go back to the beginning and say a few words about how for every trader is important to use a reliable and robust trading platform. You will need an Expert Advisor (EA). It allows you to conduct backtesting of your trading strategy before you commit your funds. You will need one that functions effectively on your smartphone and your tablet as well, a versatile platform that works well under Windows, MacOS, and Linux.

    A system with 100% success does not exist so that you must not expect any of these systems to get your earnings each and every time. But, while following all the rules you can only end up in the plus!

    How to create the first trading strategy?

    New traders start to learn trading strategies from other traders. They are mirroring strategies from experienced traders. But, how do they get started with their trading strategy?

    Fun fact 1: Creating your first trading strategy is easy.
    Fun fact 2: Creating a profitable trading strategy is hard.

    Basically, you have to follow some basic steps while formulating your first trading strategy. Building your own can be fun, easy, and surprisingly quick.

    But, don’t expect your first trading strategy will make you rich.

    So, what you have to do?

    Recognize the real reason why you want to enter the market and have principles.

    Before you start creating your own trading strategy, you must have an idea of how the market works. Most importantly, you need to answer this question.

    How to make money from trading?

    To answer this question you have to read and learn about both technical and fundamental analysis. Avoid get-rich-quick offers.  Take care of demand and supply. Never have trust in theories that claim that people are perfectly rational.

    Your principles will define your every step in the market, so it is very important to stick with it. It will need your full attention. It is an urge to follow one principle in your first trading strategy. Never choose complicated solutions. The simpler, the better. Trade by the KISS rule (Keep It Simple Stupid).

    In the beginning, you don’t want to be astounded by a complex strategy. Besides, a trading strategy with more moving parts is harder to manage and improve.

    How to choose a market for first trading strategy?

    What do you want to trade: Forex, Options, Futures, Equities?

    If you want to trade forex, you have to understand what you are buying and selling with a currency quote. You have to learn about the different models of forex brokers.  You have to know how the margin is calculated. If you want to trade equities, you must know what a share means or the difference between a blue-chip and penny stock.

    There’s a lot to learn about each market but you can not start to learn until you choose your trading market. The rule of thumb is that you must understand the market you choose to trade.

    Define a trading frame

    Yeah, I know.

    It’s not easy to decide on a trading time frame. At first, you will not know if you like more quick scalping or daily swing trading.

    Maybe an idea to try intraday trading isn’t bad. You’ll be able to watch the market for long-term periods. But you have to know, when you trade fast time frames, you get fast feedback which shortens your learning period.

    If you are not able to watch the market for long-term periods, start with end-of-day charts. With some effort, you can learn enough to decide if swing trading is for you.

    What have you to define?

    Entry trigger. – It will help you enter the market without hesitation or demur. Both, bar and candlestick patterns are useful triggers. If you prefer indicators, oscillators like the RSI and stochastics are good solutions also.

    You have to plan your exit trigger. – The market can go against you, causing you limitless losses. Having a stop-loss option is crucial. You need to plan when to exit if things go wrong and also you need to plan when to exit if things do go your way. The market will not go in your favor always. That’s why you have to know when is the moment to take profits.

    Take care about the position size

    Set your risk limit. – Once you have your entry and exit rules sorted out, you can work on limiting risk. The basic way to do so is by position sizing. This means that for a certain trading setup, your position size determines how much money you are putting on the line. If you double your position size, and you will double your risk. You should be very careful about your position size.

    And it’s time to choose a tool to determine the trend. – You don’t trade when you see a Pin Bar (shortener for ‘Pinocchio Bar,’ a single candlestick set up that clues price action traders into potential reversals in the market). Trade only when the market is rising, and you should use a bullish Pin Bar to trigger your trade. You don’t trade when you see a Gimmee Bar (price action reversal candle formation). Trade only when you conclude that the market is going sideways, and you use a Gimmee Bar to enter the market.

    You have to decide on a tool to help you judge the market context, trending or not, up or down. For example, choose price action tools like swing pivots or trend lines. You can also use technical indicators like moving averages and MACD (Moving Average Convergence Divergence).

    Write down your first trading plan

    Write down your trading rules. – It is always good advice. Your trading strategy is still simple and you might be able to memorize the trading rules. But you must write down your trading rules. If you write down the trading plan you will get a robust and trustworthy method. Just in order to ensure discipline and consistency. It also gives you a record of your trading strategy. You will find it useful when you have to improve it.

    When you have written rules, you can backtest the strategy. – When you have a discretionary trading strategy, backtesting can be an arduous process. Discretionary trading is decision-based trading where the trader decides which trades to make based on current market conditions, and system trading is rule-based trading where the trading system decides which trades to make, regardless of current conditions. So, if you have a discretionary trading strategy you need to replay the market price action and record your trades manually.

    But if you have a mechanical trading strategy and a coding background, you can speed up this stage. Looking through the trades one by one is a fantastic way to develop your market instincts. This can also help you think of ways to improve your trading strategy.

    Should you be worried if the first trading strategy is not profitable?

    It’s okay. Your trading strategy is not fixed, it is a living thing. As your experience and knowledge grow, your trading strategy will improve. Try to avoid radical changes to your trading strategy.

    Your goal is to achieve a positive expectancy with every trade. Not positive profits for each trade. Statistics have to work for you.

    One thing is the most important when you create your first strategy and enter the market for the first time.

    Don’t be stubborn on the market. That could be the biggest mistake.

  • What is the best day trading strategy?

    What is the best day trading strategy?

    What is the best day trading strategy?
    Day trading is connected to great risk but also with great potential to profit.

    By Guy Avtalyon

    So, let’s see what is day trading.

    Day trading points to the rapid purchase and sale of stocks throughout the day. With the goal that purchased stocks will climb or fall in value for the short frame of time, seconds, or minutes.

    Day traders believe that through certain day-trading strategies, they can add up small daily wins into long-term profits.

    Day traders have their own jargon and terminologies, online communities for day-trading tips, support, and strategies.

    But you have to know – day trading is risky and only for speculative investors.

    The day trading strategies

    Scalping Strategy This is the philosophy of how small wins can add up to a lot of money at the end of the day. The scalper sets a buy and sells target and sticks to these levels.

    The scalping strategy is fast and traders make buys and sell within a few seconds. This is one of the best day-trading strategies for traders who can make quick decisions and act on them without regret or doubt.

    These traders have enough discipline to sell immediately if they see a price decline. In that way, they are minimizing losses. This strategy isn’t for people with short nerves. But still, it is very popular.

    Momentum Trading Investor jumps on a stock whose price is moving up. When to use the momentum day trading strategy?
    This strategy is very popular for beginners because it focuses on news and recognizing strong trends.
    Stock movement of 30 to 40%, smaller stocks, which trade faster due to the reduced number of outstanding shares, a unique and major move in price, driven by a catalyst like a surprise earnings growth, a drug company’s huge, new treatment launch or news that a small company will be acquired by a larger firm. Option stop – loss is required as insurance.
    Just hold your position and wait to see indicators of reversal and simply get out. Also, you can decrease the price drop and round your price target at the moment the volume starts to decline.

    The most important part of this kind of day trading strategy is to be extremely aware of the expected news and earnings reports. If you execute it correctly, you’ll be able to profit from each trade. And you trade just short as few seconds per trade. Wonderful!.

    Breakout Trading – When the stock price rises above the former top resistance price you can use this strategy. You should monitor the level of stock trading volume or how many shares are changing hands. Breakout trades on high volume are more likely to be sustainable at the new higher price than those breakouts with less volume. It’s not as easy as looking at a chart, recognizing the resistance, and then buying after a breakout.

    Breakout trading focuses the point when the price clears a particular level on the chart. Also, you have to notice that the volume is increased. So, you have to enter into a long position after the stock breaks above the resistance level. The other possibility is to enter a short position when the stock breaks below the support level.

    To explain this more detail, after the stock trades beyond these levels, the volatility will increase and the stock price will usually follow the trend, meaning it will move in the direction of the breakout. Always keep in mind these two levels: resistance and support. You have to see how frequently the stock price hits them. More hits, more volatility, more important the levels become.
    Plan your entry point according to which level the price hits. If the price is set close or higher than the resistance level is, you’ll need to take a bearish position. The contrary is when the price hits the support level or move below. In that case, you’ll need to take a bullish position.

    Your exits should be set reasonably. Calculate the average recent changes in price to set your price target. For example, if the average price is 3 points more than the last few swings, your price target will be rational. When the stock price hits your target price, just exit the position and take your profit. You had a winning trade.

    Day trading on news

    News Trading – You must be keeping an eye on the business news, day traders can capitalize on the popular daily stories.

    If the news is bad, you might short the stock during the day by “borrowing” shares of the stock from the investment firm. And then selling those borrowed shares.

    Similarly, if the stock price declines as expected, you should buy the shares back at the lower price and profit from the difference less a commission payment. If the news is good, you go long or buy the stock outright and sell the shares after the price rises. 

    Pullback Trading – The first step is to look for a stock with an established trend. Then, monitor the trend until there’s a price decline from the trend. If the established trend is upward, then the pullback is an entry point for the day trader to buy.

    If the trend completely reverses after you buy-in, there’s no need to panic. The trend usually continues in the trending direction for a long time.

    You may find pullback ”candidates” from the stocks making the biggest gains.

    Is there any risk involved

    But be aware!  ”Day trading is extremely risky and can result in substantial financial losses in a very short period of time,” according to the SEC website.

    And one advice: If you’re afraid to try your hand at day trading, only invest money that you can afford to lose.
    Or don’t try this!

    Read more about Strategies to Avoid Bad Investment Moves

     

  • The Trading Strategies That Actually Work

    The Trading Strategies That Actually Work


    Seeking for the holy grail

    By Guy Avtalyon

    The trading strategies that actually work? How to choose? Where to find? Okay, I understand your dilemma. You would like to be successful and you want to know, what strategy should you choose to nail it.

    Listen here! First, let’s make clear what the Trading Strategy is

    A trading strategy is a set of trading settings that serve the currency trader to determine whether to buy or sell a currency, where to enter and exit the position, and how much capital they invest in trade, and in doing so, earn a difference in price.

    Question everything, it is a vital part of your trading.

    A forex broker can offer you the opportunity to enter into trades that are multiple times the value of the margin that you place.

    The market is fluid and you can open a trade or exit from one very quickly, so there is potential to make considerable returns.

    To complicated? Wait!!! There is more!

    Trading strategies can be – automated (various robots for trading, etc.) – manual (the vast majority of traders use their own trading system.)

    The trading strategies that actually work

    I would like to show you some of them which are successful. I will give you a brief description of 5 simple strategies that can help you to maximize your profits:

    1) Swing trading is one of the trading strategies that actually work

    You can have a profitable swing trade by timing your trade when there is a breakout after a period of consolidation.

    What does this mean? A period of consolidation is said to occur when a currency pair moves in a well-defined price range. A breakout will occur. The values of the currencies will “breakout” a resistance level. If you predict the breakout precisely, you can profit from your trade.

    A swing trade uses a channel trading strategy. Trades take place between the support and resistance levels of swing highs and swing lows.

    2) Rangebound trading 

    Here you will need to identify a currency pair that trades within a certain range. Then, you have to identify the support and resistance levels and then time your trade by taking these movements into account.

    It is likely that there will not be a big difference between the upper and lower prices of the range. Because of this reason, you could trade in one of two ways.

    The first option is to trade within the range which will limit your profits as the price difference is bound to be minimal.

    The second way is to look for a breakout from the range. If this happens, you will have to react quickly. You can make a quick profit, but you can lose out. A “false breakout” may cause the market to move in the opposite direction and lead to great losses.

    3) Position trading

    A position trade is not a short-term trade. It is based on macroeconomic trends. It could run over weeks or months or years. Traders take a long-term position based on an understanding of how inflation or the rate at which an economy is growing, will affect the value of a currency. If you want to adopt this strategy, you have to stay stick to two rules. First, do not use much leverage. A maximum of 10:1 is advisable. Secondly, the size should be relatively small. This is because you are taking a position with expecting a reasonably large movement in the relative price of the currency pair.

    4) Carry trade

    A carry trade means entering into a trade that will take advantage of the interest rate differential of the two currencies.  That means you will be selling a currency with a low-interest rate and buying one that provides a greater rate of interest.

    Normally, you would choose a currency pair where the higher interest rate currency will appreciate to the lower interest rate currency.

    Carry trades can be high-risk. They are based on a combination of technical and fundamental analysis.

    5) Momentum trading

    Fun fact: “The prices usually tell lies, but momentum usually speaks the truth.”

    At the simplest level, you can use momentum trading when rates are going up, then you should buy and when they are declining, you should sell and maximize your profits in the forex market. If you want to implement this strategy, you have to identify the currency pairs that show the greatest momentum and have moved most strongly. It is possible by tracking price movements over a period of several weeks. Then trade those pairs that show the greatest momentum.

    How to find the trading strategies that actually work?

    Let’s get back to the beginning and say few words about how important is for every trader to use a reliable and robust trading platform. You will need an Expert Advisor (EA). It allows you to conduct backtesting of your trading strategy before you commit your funds. You will need one that functions effectively on your smartphone and your tablet as well, a versatile platform that works well with Windows, Mac OS, and Linux.

    The trading strategies that actually work 100% don’t exist. A system with 100% success does not exist so that you do not expect any of this system to win your earnings every time.

    But with RRR (Required Rate Of Return) 1: 2 and following all the rules, you can only end up in the plus!

    Wish you luck!!!