Strategies For Profiting In Trending And Ranging Markets

Strategies For Profiting In Trending And Ranging Markets – Some forex traders are extremely patient and love to wait for the perfect setup, while others need to see the move happen quickly or they will exit their positions. These impatient souls are ideal momentum traders as they wait for the market to have enough strength to move the currency in the desired direction and back on the momentum hoping for an extension.

However, once the movement shows signs of losing steam, an impatient momentum trader will also be the first to jump ship. Therefore, a true momentum strategy must have strong exit rules to protect profits while being able to make as many extensions as possible. The 5 Minute Momo Strategy does just that.

Strategies For Profiting In Trending And Ranging Markets

A five-minute momo looks for a momentum or “momo” breakout on very short-term (five-minute) charts. First, traders use two technical indicators that are available with many charting software packages and platforms: the 20-period Exponential Moving Average (EMA) and the Moving Average Convergence Divergence (MACD). The EMA is chosen over the simple moving average because it gives more weight to recent movements, which is necessary for quick trades.

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While the moving average is used to determine the trend, the MACD histogram, which helps us gauge momentum, is used as a second indicator. MACD histogram settings are default settings used by most charting platforms: EMA = 12, second EMA = 26, signal line EMA = 9, all use closing prices.

This strategy waits for a reversal trade, but takes advantage of the setup only when momentum supports the reversal enough to create a larger extension streak. The position exits in two separate segments; the first half helps us lock in the gains and make sure we never turn a winner into a loser, while the second half allows us to try to catch what could become a very big move without risk because the stop is already moved to the breakeven level. Here’s how it works:

Our first example is EUR/USD on March 16, 2006, when we see the price move above the 20-period EMA as the MACD histogram crosses the zero line. Although there were a few instances where the price tried to rise above the 20-period EMA during the period from 1:30 p.m. and 2:00 p.m. ET, the trade was not activated at that time as the MACD histogram was below the zero line.

We waited for the MACD histogram to cross the zero line and when it did, the trade was activated at 1.2044. We enter 1.2046 + 10 points = 1.2056 with a stop at 1.2046 – 20 points = 1.2026. Our first target was 1.2056 + 30 pips = 1.2084. It was activated about two and a half hours later. We exit half the position and trail the remaining half at the 20-period EMA minus 15 pips. The other side eventually closes at 1.2157. 21:35. ET for a total profit from the trade of 65.5 dice.

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The next example (above) is USD/JPY on March 21, 2006, when we see the price break above the 20-period EMA. As with the previous EUR/USD example, there were also a few instances where the price crossed the 20-period EMA just before our entry point, but we did not enter the trade because the MACD histogram was below the zero line.

The MACD turned first, so we waited for the price to cross the EMA by 10 points, and when it did, we entered the trade at 116.67 (the EMA was 116.57).

The math on this is a bit more complicated. The stop is at the 20-EMA minus 20 pips or 116.57 – 20 pips = 116.37. The first goal is the entry plus the amount at risk, or 116.67 + (116.67-116.37) = 116.97. It activates five minutes later. We exit half the position and trail the remaining half at the 20-period EMA minus 15 pips. The second half closes at 117.07 at 18:00. ET for a total average profit per trade of 35 dice. Although the profit was not as attractive as the first trade, the chart shows a clean and smooth movement, indicating that the price action was well in line with our rules.

Briefly, our first example is NZD/USD on March 20, 2006 (shown below). We see the price cross below the 20 period EMA, but the MACD histogram is still positive, so we wait for it to cross below the zero line 25 minutes later. Our trade is then activated at 0.6294. As with the previous USD/JPY example, the math in this case is a little messy because the moving average crossover did not occur at the same time as the MACD moved below the zero line, as it did in our first EUR/USD example. As a result, we enter 0.6294.

Range Trading Explained

Our stop is the 20-EMA plus 20 pips. At that time the 20-EMA was at 0.6301, making our entry at 0.6291 and our stop at 0.6301 + 20 pips = 0.6321. Our first target is entry price minus amount at risk, or 0.6291 – (0.6321 – 0.6291) = 0.6261. The goal is reached two hours later and the second-half stoppage time is moved to the break-even level. Then we continue to follow the side of the second position by the 20-period EMA plus 15 pips. The other side then closes at 0.6262 for a total profit from the trade of 29.5 pips.

The above example is based on an option that was developed on March 10, 2006 for GBP/USD. In the chart below, the price crosses the 20-period EMA and we wait 10 minutes for the MACD histogram to cross into negative territory, triggering our entry order at 1.7375. Based on the rules above, once the trade is triggered, we stop at the 20-EMA plus 20 pips, or 1.7385 + 20 = 1.7405. Our first target is the entry price minus the amount at risk, or 1.7375 – (1.7405 – 1.7375) = 1.7345. It is activated shortly after.

Then we continue to follow the side of the second position by the 20-period EMA plus 15 pips. The other half of the position is eventually closed at 1.7268 for a total profit from the trade of 68.5 pips. Coincidentally enough, the trade was closed just as the MACD histogram turned into positive territory.

As you can see, the five-minute momo trade is an extremely powerful strategy for capturing momentum-based reversals. However, this does not always work, and it is important to study an example where it fails and understand why it does.

Foreign Exchange Market

The last example of a five-minute momo trade is EUR/CHF on March 21, 2006. As seen above, the price is above the 20 period EMA and we are waiting for 20 minutes for the MACD histogram to cross into negative territory. placing our entry order at 1.5711. We place our stop at the 20-EMA plus 20 pips or 1.5721 + 20 = 1.5741. Our first target is the entry price minus the amount at risk, or 1.5711 – (1.5741-1.5711) = 1.5681. The price drops to a low of 1.5696, which is not low enough to hit our trigger. It then continues to reverse course, eventually reaching our stop, resulting in a total trade loss of 30 points.

When using strategies based on technical indicators, it is useful to use a broker that offers charting platforms with the ability to automate entries, exits, stop-loss orders and trailing stops.

When trading the five minute momo strategy, the most important thing to watch out for is trading ranges that are too narrow or too wide. During quiet trading hours, when the price is simply hovering around the 20-EMA, the MACD histogram can swing back and forth, causing many false signals. Alternatively, if this strategy is executed on a currency pair with too wide a trading range, the stop may be reached before the target is triggered.

This trading strategy looks for bursts of momentum on short-term, 5-minute forex trading charts that a market participant can take advantage of, and then quickly exits when the momentum begins to fade.

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The 5-minute Momo strategy is used by currency traders looking to take advantage of short-term changes in momentum, and could therefore be used by day traders or other short-term market participants.

Scalping is the process of entering and exiting trades several times a day for small profits. The process of scalping in foreign exchange trading involves frequent moves in and out of foreign currency positions in order to make a small profit. A 5 minute trading strategy can be used to help with such trades.

The 5-Minute Momo Strategy allows traders to profit from short-term momentum in forex pairs, while also providing the solid exit rules needed to protect profits. The goal is to identify a reversal when it happens, open a position, and then rely on risk management tools like stops to profit from the move and not jump ship too quickly. As with many systems based on technical indicators, results will vary depending on

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