Momo 100 Forex Trading Strategy

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Momo 100 Forex Trading Strategy

Momentum indicator, what is it and how could we use it?

At first glance, the momentum indicator might seem just like any other oscillating indicator. It oscillates up and down on another window, trying to mimic the movement of price. But there is a certain characteristic with this indicator that sets it apart from all the other oscillating indicators. It doesn’t only mimic price movement, but in doing so, it takes into account the speed of price movements.

The momentum indicator is computed by determining the difference of the current closing price and the closing price a certain number of periods ago. By doing so, we could determine how far price has moved in a fixed period of time. As with the basic definition of speed, we are able to determine distance traveled in a certain period of time.

The 100 Cross Momentum Indicator Method

There are many ways to use the momentum indicator. But one of the more popular ways to use the momentum indicator is taking a trade as the momentum indicator crosses the 100 level. The 100 level represents the midline. If the momentum indicator is above it and is still heading up, the bias of the market based on momentum is said to be bullish. On the other hand, if the momentum indicator is below the 100 level, then the market is said to be bearish based on momentum.

This concept is very simple, much like other oscillating indicators, a signal is generated as the indicator crosses the midline.

However, the momentum indicator also has its flaws. Due to its simplistic formula, the plotting of the indicator is a little bit jagged. This causes the indicator to chop around at times especially when price is also chopping up and down on a relatively wide range.

Still, even with these flaws, the momentum indicator is very much useful. We don’t have to throw the baby out with the bathwater. We shouldn’t disregard this indicator just because of this weakness.

Trading Strategy Concept

The idea behind this strategy is to use the momentum indicator’s crossing over the 100 level as a signal but filter out trades that are not in agreement with the main trend.

The question is how do we determine the main trend? To do this, we will be using the 100 Exponential Moving Average (EMA). This moving average is leaning towards the longer-term trend. As such, during a trending market, price would seldomly whipsaw the 100 EMA, making it a good filter for the momentum indicator’s crossing of the 100 level.

Still, it is not perfect. There will be times when the momentum indicator would still whipsaw the 100 level. But we will not be going in and out of the market on every cross. Instead, we will allow the market to take us out of the trade by taking a loss only based on the stop loss. The stop loss would be based on the most recent minor swing highs and lows.

Indicators:

  • Momentum
  • 100-period EMA (green)

Timeframe: 1-hour and 4-hour chart

Currency Pair: any

Trading Session: any

Buy (Long) Trade Setup Rules

Entry

  • Price should be above the 100 EMA
  • The market should be in a bullish trend, making higher swing highs and lows
  • Allow the momentum indicator to go below the 100 level on the retrace
  • Wait for the momentum indicator to go back above the 100 level as the trend resumes
  • Take a buy market order on the confluence of the above rules

Stop Loss

  • Set the stop loss on the most recent minor swing low

Take Profit

  • Set the take profit target price at 2x the risk on the stop loss

Sell (Short) Trade Setup Rules

Entry

  • Price should be below the 100 EMA
  • The market should be in a bearish trend, making lower swing lows and highs
  • Allow the momentum indicator to go above the 100 level on the retrace
  • Wait for the momentum indicator to go back below the 100 level as the trend resumes
  • Take a sell market order on the confluence of the above rules

Stop Loss

  • Set the stop loss on the most recent minor swing high

Take Profit

  • Set the take profit target price at 2x the risk on the stop loss

Conclusion

This is a basic strategy using the momentum indicator’s crossing of the 100 level. What makes it different though is that it filters out trades that aren’t on a longer-term trend by using the 100 EMA.

On the right market condition, this strategy should allow you to get into trades that would trend quite longer. However, because of the fixed take profit ratio, we could be capping our profits, as you could notice on some of the charts.

If you feel a bit aggressive, you could modify the exit strategy. You could opt to use a trailing stop as an exit strategy. It could be by moving the stop loss as price makes new swing highs or lows. It could also be by using a fixed ATR. It is up to you. Setting up a fixed take profit target though leans toward the more conservative side.

It would also be good to complement this strategy with a price action-based thesis. It could be a break of smaller trendline, a candlestick pattern, or a price pattern. This could increase the probability of a successful trade as other traders might be taking the same trade but based on a different price action-based strategy.

All in all, this strategy is something that could be added in your arsenal of strategies and could be used in confluence with other trading setups.

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