Trading is much like a game of basketball. Two teams are playing. One side are the bulls and the other side are the bears. Both sides struggle to push their team for that win. Basketball is a game that is wherein momentum plays a very big role. In fact, many professional players would agree that it is a game of runs. One big play can change the chemistry of a team. Players could be making mistakes here and there, but one big shot or a dunk can bring the fans on their feet and the team back in the game. Suddenly, the losing team would start hitting their shots and turn the game around. This is called a run. The same is true with trading. One big move in price can shift the momentum. One big candle can turn the market sentiment around.
Just like in basketball where one big shot can snowball into a run, a single momentum breakout can start a trend. Momentum trading strategies are very powerful. Yes, it can push price in the same direction very easily in the next few candles, but it could also have an effect further along the price chart if it causes the market to start a trend.
Acceleration Bands are custom technical indicators which is similar to band or channel-based technical indicators. It plots lines that envelope price action most of the time and helps traders identify overbought or oversold market conditions, as well as momentum breakout scenarios.
Acceleration Bands plot three lines that form a channel on the price chart. The middle line is a modified moving average which is characteristically very smooth and yet follows price action quite closely. The outer lines are shifted above and below price action based on a factor derived from the middle line. The result is a channel like structure which envelopes price action.
This indicator can be used to identify trends based on the location of price in relation to the middle line. Price would also typically stay on the half of the channel where the trend is moving.
It can also be used to identify short-term mean reversals. The outer lines can be a basis for overbought and oversold market conditions. Price action rejecting these dynamic support and resistances may indicate that price is reversing back to its mean.
On the other hand, this indicator can also be used as a basis for momentum breakouts. Strong momentum candles that break outside of the channel can indicate a strong momentum breakout scenario. This momentum breakouts can be the start of a new trend.
The Awesome Oscillator (AO) is a momentum indicator which identifies trend direction based on the crossing over of its underlying moving average lines.
The AO is computed by the value of a 34-period Simple Moving Average (SMA) from a 5-period Simple Moving Average (SMA). However, instead of using the usual close of each candle, AO computes its underlying SMA lines based on the median of each candle. The result is then plotted as an oscillating histogram bar. The value of the bars indicates the general direction of the trend, while the color of the bars indicates the momentum of the trend.
Positive green bars indicate a strengthening bullish trend, while positive red bars indicate a weakening bullish trend. On the other hand, negative red bars indicate a strengthening bearish trend, while negative green bars indicate a weakening bearish trend.
Accelerator Bands Momentum Forex Trading Strategy is a momentum breakout strategy that trades on momentum breakouts occurring early in a new trend that is developing.
The Acceleration Bands and a 50-period Exponential Moving Average (EMA) line is used to identify trend direction and trend reversals.
Trend reversals are identified based on the crossing over of the middle line of the Acceleration Bands and the 50 EMA line. However, instead of trading on the first sign of a trend reversal, we will wait for a momentum breakout confirmation.
The Awesome Oscillator should also confirm the direction of the trend. The AO bars should generally agree with the direction of the trend based on whether the bars are positive or negative.
We then wait for price to retrace after the reversal.
After the retracement, price should break out of the channel in the direction of the new trend. The momentum breakout is then confirmed based on the color and value of the AO histogram bars.
- 50 EMA
Preferred Time Frames: 15-minute, 30-minute, 1-hour, 4-hour and daily charts
Currency Pairs: FX majors, minors and crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
- The middle line of the Acceleration Bands should cross above the 50 EMA line.
- The AO bars should generally be positive.
- Price should contract after the initial bullish price swing.
- A bullish momentum candle should close above the upper line of the Acceleration Bands.
- The AO bars should be positive green.
- Enter a buy order on the confirmation of these conditions.
- Set the stop loss on the support level below the entry candle.
- Close the trade as soon as price closes below the 50 EMA line.
Sell Trade Setup
- The middle line of the Acceleration Bands should cross below the 50 EMA line.
- The AO bars should generally be negative.
- Price should contract after the initial bearish price swing.
- A bearish momentum candle should close below the lower line of the Acceleration Bands.
- The AO bars should be negative red.
- Enter a sell order on the confirmation of these conditions.
- Set the stop loss on the resistance level above the entry candle.
- Close the trade as soon as price closes above the 50 EMA line.
This simple trading strategy is a new method of trading momentum breakouts based on Accelerator Bands. Momentum breakout strategies using channels and bands are very effective. This is because it objectively allows traders to identify market contraction and market expansion phases. Momentum breakouts typically occur right after a market contraction phase. This method allows traders to spot these conditions objectively and enter the market as the momentum breakout is confirmed. Traders could then easily ride the new trend if the momentum breakout does continue to become a trend.
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