Momentum trading is one of the most viable ways to trade the forex market. In fact, there are many professional profitable traders who include momentum as part of their main criteria when making a trade decision.
Momentum trading is simply a technique in trading wherein traders would make a trade in the direction of the most recent strength or price. In physics, momentum is a factor of speed and mass. The same is true in trading, except that instead of mass, traders look for volume. In other words, momentum trading is trading in the direction where price has recently moved in the least amount of time with huge volume.
There are many ways to identify momentum based on technical analysis. There are oscillators that could help traders identify momentum and trend. There are also channel or band based indicators that can help traders identify momentum breakouts. Price action and naked chart traders make use of a candle stick pattern called Marobozu, which is a full-bodied candle with no wicks, to help them identify momentum price movements. I simply call this type of candles as a momentum candle. When used in the right context, confluences between these techniques can produce high quality momentum indications which traders can use.
In this strategy, we will be looking at how a combination of these different techniques can produce a high-quality momentum setup which tends to produce good trades.
Table of Contents
The Darvas Box indicator is a simple channel based technical indicator which helps traders identify markets that could possibly be gaining strong momentum.
This indicator simply draws a channel based on the most recent highs and lows of price action. It then adjusts the channel as price action creates new highs and lows.
The Darvas Box indicator was developed by Nicolas Darvas. His trading philosophy was to simply buy into stocks that are making new highs, which is somehow the concept behind momentum trading. With the concept of short positions now available, we can also take the same concept and flip it over to trade currency pairs that are making new lows.
The Awesome Oscillator (AO) is a technical indicator used by traders to identify trend direction and momentum. It is an oscillator which is based on the concept of moving average crossovers.
The AO is simply an oscillator based on the difference of two moving average lines, namely the 5-period and 34-period Simple Moving Average (SMA) lines. However, instead of using the close of each candle as a basis for its computation, it makes use of the median of each candle as its basis.
Given that the indicator is based on the difference of the two moving average lines, it could be said that the indicator is simply a crossover of two moving average lines. The advantage is that trend strength and weakness can be identified using this indicator.
The indicator simply plots the difference between the two lines as histogram bars. The color of the bars also changes depending on the strength or weakness 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.
The AO can be used as a trend direction filter. Traders can use the information regarding trend direction and strength to filter out trades that do not conform with the direction of the trend. It can also be used as a trend reversal entry signal based on the crossing over of the bars from negative to positive or vice versa.
Darvas Momentum Signal Forex Trading Strategy is a momentum-based trading strategy which finds confluences between an envelope type momentum indicator, an oscillator type momentum indicator and a price candle signal.
First, we must identify the long-term trend direction based on the 200-period Exponential Moving Average (EMA) line. The long-term trend direction is based on the slope of the 200 EMA line, as well as the general location of price action in relation to the 200 EMA line. Price action should also show a trending market based on the swing highs and swing lows.
Then, we will be using the Awesome Oscillator to identify trend direction. This is simply based on whether the bars are positive or negative.
Entry signals are then qualified based on a momentum candle pushing against the Darvas Box indicator as it creates a new high or low.
- 200 EMA
Preferred Time Frames: 30-minute, 1-hour and 4-hour charts
Currency Pairs: FX majors, minors and crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
- Price action should be above the 200 EMA line.
- The 200 EMA line should slope up.
- The Awesome Oscillator bars should be positive.
- Enter a buy order as soon as a bullish momentum candle pushes the upper Darvas Box line.
- Set the stop loss below the lower Darvas Box line.
- Set the take profit target at 2x the risk on the stop loss.
Sell Trade Setup
- Price action should be below the 200 EMA line.
- The 200 EMA line should slope down.
- The Awesome Oscillator bars should be negative.
- Enter a sell order as soon as a bearish momentum candle pushes the lower Darvas Box line.
- Set the stop loss above the upper Darvas Box line.
- Set the take profit target at 2x the risk on the stop loss.
This trading strategy is a simplistic approach to trading momentum. It trades momentum signals that are aligned with the main trend direction.
Given that this strategy is based on the Darvas Box, it is important to note that the characteristics of the Darvas Box during a trending market is that it creates a staircase like structure with steps moving in the direction of the trend. This is formed as price pushes with momentum in the direction of the trend.
This type of trading strategy requires a certain feel for the market. Traders who could master trading in the direction of the trend and momentum with enough discipline to avoid trading trends that are losing steam could profit using this strategy.
Forex Trading Strategies Installation Instructions
Darvas Momentum Signal Forex Trading Strategy is a combination of Metatrader 4 (MT4) indicator(s) and template.
The essence of this forex strategy is to transform the accumulated history data and trading signals.
Darvas Momentum Signal Forex Trading Strategy provides an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye.
Based on this information, traders can assume further price movement and adjust this strategy accordingly.
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How to install Darvas Momentum Signal Forex Trading Strategy?
- Download Darvas Momentum Signal Forex Trading Strategy.zip
- *Copy mq4 and ex4 files to your Metatrader Directory / experts / indicators /
- Copy tpl file (Template) to your Metatrader Directory / templates /
- Start or restart your Metatrader Client
- Select Chart and Timeframe where you want to test your forex strategy
- Right click on your trading chart and hover on “Template”
- Move right to select Darvas Momentum Signal Forex Trading Strategy
- You will see Darvas Momentum Signal Forex Trading Strategy is available on your Chart
*Note: Not all forex strategies come with mq4/ex4 files. Some templates are already integrated with the MT4 Indicators from the MetaTrader Platform.
Click here below to download: