One of the most popular ways to trade the forex market is by using momentum strategies. This is because momentum or breakout strategies could provide huge returns for the risk being undertaken. It is like hitting a homerun every time a trader gets a win using a momentum strategy. Most momentum breakout strategies have very high reward-risk ratios which could make traders extremely profitable even with just a decent win rate.
The concept behind momentum breakouts is that price tends to continue the direction of a strong momentum price movement. If you think about it, this is true even outside of trading. Think of a freight truck barreling down the road at a high speed. Anything that is put on its way would certainly get crushed and pushed along with it. This is exactly what momentum is. A huge mass moving at a high velocity.
In trading, the same concept holds true. A huge volume moving strongly in one direction within a short period is considered momentum. Any trade that is placed in front of it risk ruin. Any trade placed in front of it having the same direction as the momentum candle, with the intention of being carried along with it, has a good chance of resulting in a win.
Pip Boxer Momentum Breakout Forex Trading Strategy is a classic momentum breakout trading strategy that produces trade signals coming from market congestions and range bound markets.
Pip Boxer Indicator
Pip Boxer indicator is a custom technical indicator which helps traders identify momentum and mean reversals. It is an oscillating indicator which is unbounded and could move from positive to negative and vice versa. However, it often ranges from -300 to 300.
The Pip Boxer indicator is displayed as an oscillator using a line. It also has a midline at zero, and markers at -100 and 100.
As a momentum indicator, the Pip Boxer line usually oscillates within the -100 to 100 range during a contracted market condition. However, as price movements gain momentum, the Pip Boxer line would breach beyond this range. A bullish breakout is indicated by a breach above 100, while a bearish breakout is indicated by a drop below -100.
On the flip side, prices are considered overbought or oversold whenever price is beyond the -100 to 100 range. As momentum dies out, the Pip Boxer line would reverse back within the range. Price is in a mean reversal condition as the Pip Boxer line goes back within the -100 to 100 level.
Bollinger Bands
The Bollinger Bands is a valuable indicator because it provides multiple information using just one indicator. It allows traders to identify momentum, volatility, trend and mean reversals.
The Bollinger Bands is composed of three lines. The middle line is a 20-period Simple Moving Average (SMA). The outer lines on the other hand are standard deviations derived from the middle line.
Since the middle line is a 20 SMA line, it could also be used to identify trend as a regular moving average line is used. Trend direction is usually based on the slope of the 20 SMA line.
The outer bands help identify momentum, volatility and mean reversals. Price is in a strong momentum whenever price breaches the outer bands and stays close to it. On the flip side, price action that shows signs of price rejection on the area near the outer bands could indicate a mean reversal. Volatility is simply based on the contraction and expansion of the outer bands. A Bollinger Band that is contracting indicates a market contraction phase, while a Bollinger Band that is expanding indicates an expansion phase.
Trading Strategy
This trading strategy is a momentum trading strategy which combines the momentum signals coming from the Bollinger Bands and the Pip Boxer Indicator. Trade signals should be closely aligned and should be in confluence. On top of that, price action should also confirm the momentum breakout setup.
On the Pip Boxer Indicator, the Pip Boxer line should breach level 100 on a bullish breakout or drop below -100 on a bearish breakout.
Price should also close beyond the outer lines of the Bollinger Bands indicating a probable start of a momentum breakout. The Bollinger Bands should also start to expand indicating the start of an expansion phase, which goes together with a momentum breakout.
A momentum candle should also be observed near the signal candle or the signal candle itself should be a momentum candle. These are long solid bodied candles with little to no wicks.
The trade is allowed to continue the direction of the breakout until a reversal candlestick pattern is observed.
Indicators:
- PipBoxer_Indicator (default setting)
- Bollinger Bands
- Deviations: 2
Preferred Time Frames: 5-minute, 15-minute, 30-minute, 1-hour and 4-hour charts
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- A bullish momentum candle should be observable on the chart.
- Price should break and close above the upper Bollinger Band.
- The Bollinger Bands should start to expand.
- The Pip Boxer Indicator line should cross above 100.
- Enter a buy order upon the confirmation of these conditions.
Stop Loss
- Set the stop loss a few pips below the entry candle.
Exit
- Close the trade as soon as a bearish reversal candlestick pattern is observed.
Sell Trade Setup
Entry
- A bearish momentum candle should be observable on the chart.
- Price should break and close below the lower Bollinger Band.
- The Bollinger Bands should start to expand.
- The Pip Boxer Indicator line should cross below -100.
- Enter a sell order upon the confirmation of these conditions.
Stop Loss
- Set the stop loss a few pips above the entry candle.
Exit
- Close the trade as soon as a bullish reversal candlestick pattern is observed.
Conclusion
Momentum breakout trading is one of the most lucrative trading strategies. In fact, many profitable traders who have made a fortune out forex trading use a variation of a momentum strategy.
This trade strategy is a combination of classic momentum entry setups. It is further improved by combining different parameters in order to confirm the momentum breakout.
The key to trading momentum breakouts is discipline. Most traders chase price whenever they see a momentum candle. Sometimes momentum candles that are too long could reverse instantly. These candles could be just price spikes caused by news releases and could have consumed all the pocket or space where price could move. One way to avoid this is to look at the Average True Range for the hour or the day, depending on what timeframe is being traded, and assess if price could have already consumed all the movement space in one candle.
Another error is not exiting the trade even when price action is showing signs that the trade is not working out. Remember, the key to trading success is discipline. Master this and you will be successful.
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