Momentum traders are truly a unique group of individuals. To engage in momentum trading, you must have the mental focus to remain steadfast when things are going your way and to wait when targets are yet to be reached. Unlike other traders or analysts who dissect a company’s financial statements or chart patterns, a momentum trader is only concerned with stocks in the news. These stocks will be the high percentage and volume movers of the day. Momentum trading requires a massive display of discipline, a rare personality attribute that makes short-term momentum trading one of the more difficult means of making a profit. Let’s look at a few techniques for successful momentum trading.

Techniques for entry

Dr. Alexander Elder had designed an impulse system for momentum trading. To identifying appropriate entry points the system simultaneously uses two indicators:

i) Exponential moving average – EMA is used to measure market inertia i.e for finding uptrends and downtrends

ii) Moving Average Convergence-Divergence – MACD measures market momentum.

When EMA rises, the inertia favors the bulls, and when EMA falls, inertia favors the bears. To measure market momentum, the trader uses MACD histogram, which is an oscillator displaying a slope reflecting the changes of power among bulls and bears. When the slope of the MACD histogram rises, bulls are becoming stronger. When it falls, the bears are gaining strength. The system issues an entry signal when both the EMA and MACD move in the same direction, and an exit signal is issued when these two indicators diverge. If signals from both the EMA and the MACD histogram point in the same direction, both inertia and momentum are working together toward clear uptrends or downtrends. When both the EMA and the MACD histogram are rising, the bulls have control of the trend, and the uptrend is accelerating. When both EMA and MACD histogram fall, the bears are in control, and the downtrend is paramount.

Times You trade

The unfavorable time for momentum traders is during lunch (12 – 2pm), where volume dries up and the moves are choppy to fl at. So momentum traders should limit the times they trade to the first and last hour of the day trading session. This is because volatility is very high during these two time slots.

Techniques for exiting positions

The key to being a successful momentum trader is to know when to exit the position. Once you have identified and entered into a strong momentum trade i.e. when daily EMA and MACD histogram are both rising, you should exit your position at the very moment either indicator turns down. Since momentum traders initiate positions during the most volatile times during the trading day, sharp corrections are commonplace. This is why it is imperative that prior to plunging into the momentum trade, the traders must become acclimated to the speed of the market.