TRADE TRENDS IF MOMENTUM TAKES A LOSS

CONSULTING ANALYST, INTERTRADER

A DEAR child has many names. The strategy below is called “lost momentum” in my vocabulary, but it no doubt has other names too. It is in essence a form of trend following strategy.

INGREDIENT NO. 1: DEFINE THE TREND
I recommend using a simple or exponential moving average (MA) of more than 50 bars. Some have reported good results with the 62 period MA. I don’t want you to get too bogged down with rigid definitions. You are looking for a trending market, which trades above your chosen MA, and the MA is pointing up (for long positions – reverse the instructions below for short positions).

INGREDIENT NO. 2: DEFINE YOUR TIME FRAME
You can use this technique on any time frame. I find it lends itself very well to day trading on the 15 minute chart, and swing trading on the four hour chart.

SET-UP FOR “BUY SIGNAL”:
Your chosen market is trading above your MA indicator and the MA is pointing up. If you observe that the market is taking out a previous low (that previous low must be at least 8 bars prior to the current bar), you now wait until the market closes back above the price point of the previous low. That is your buy signal.

EXAMPLE:
Euro-dollar yesterday made a low at midnight at $1.3920. However the trend was up on my 30 minute chart. At 8.30am the euro dipped below $1.3920 by about 10 points. It closed below $1.3920 too but on the very next 30 minute bar, the euro closed back above $1.3920. That is my signal to buy euro-dollar, with a stop-loss below $1.3920.

The technique stems from the observation that even in a trending market you will often find that price dips below a previous low, only to immediately resume its trend higher. All I attempt to do is to trade in the direction of the trend defined by the moving average. I reverse the instruction above for selling short.

Happy Trading.
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