AtoZ Markets - Before starting to trade, a trader should understand the forex market very profoundly. Later on, he needs to create and implement a forex trading strategy with a proven track record. As we know, the forex market is very uncertain. You cannot sustain here unless you have a profitable trading strategy.
What is a Profitable Trading Strategy?
There are many forex trading strategies available on the internet. Well-known traders or mathematicians created most of them. You have to pick one from these that suits your trading psychology. Among the profitable forex trading strategies, the momentum-based strategy is very famous. Many professional traders use this strategy, and there are several systems of use. You can use momentum as your primary trading strategy, or use it as a secondary strategy to increase your trading probability.
What is Forex Momentum Trading Strategies?
In the forex market, "Momentum" means buying a currency pair when it is going up, and selling it when it is going down. There are many academic surveys, and studies showed that this trading principle works well in all speculative markets. Most importantly, this strategy is profitable over time, and it has a winning trading "edge."
In the forex market, no one can predict where the market may head. Therefore, if you expect a price to come down, you probably don't know when it would come or how strongly it would come. However, in this momentum-based trading strategy, you don't need to hope that the price will go down or up. Instead, you are following what is happening in the market right now.
In the next section, we will see the best momentum trading strategy in the forex market with a proven track record.
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Best Momentum Trading Strategy
The best momentum trading strategy is a complete guide of a trading strategy that can be used by both new and experienced forex traders.
Let's see the best momentum trading strategy in a step by step approach:
Pair Selection
The first part of this trading strategy is to determine the changes in price over the last three months of 28 Forex major and cross pairs. It is straightforward to make this calculation on the weekend. You can determine the 13 weeks price movement that represents price changes for the last three months.
There are no specific rules regarding how much currency pair you should choose. However, the best practice is to use seven major currency pairs with cross pairs. In the exotic pairs, there are a lot of risks as it requires much spread and volatility.
After calculating the price movement of the last 13 weeks, you need to determine the currency pair that moved much compared to the other pairs. For example, among GBPUSD, USDJPY, NZDUSD, AUDUSD, and EURUSD, the GBPUSD was the highest gainer in the last three months. Therefore, in this trading strategy, we will trade GBPUSD only.
It is a proven trading strategy as it is capable of providing an annual 17% profit on average.
The reason for using three months' average price is that it has a proven record of providing a good result for almost seven years.
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Enter the Trade
It is possible to make the overall trading results much better by applying a position trading strategy towards the direction of the previously determined trend.
There are many trend continuation trading strategies that you can use. However, in this strategy, we will use 20 EMA on an hourly chart as a dynamic level.
It would help if you saw the price to reject the dynamic level of 20 EMA after some correction or get an hourly close below or above the dynamic level on a strong trend. Therefore, to determine the strength of the trend, you can use RSI.
As the RSI (Relative Strength Index) moves from 0 to 100, any rebound from 30 levels or 70 levels would indicate the future bullish or bearish possibility. On the other hand, you can focus on the support and resistance levels, but selling from a minor resistance in a bearish trend and buying from small support on a bullish is good.
To enter the trade, you must wait for a proper candlestick formation like pinbar, two bar, or engulfing bar from a minor support and resistance levels. Therefore, enter the trade when it closes only.
Trade Management
After hitting the buy or sell button, you must determine the trend, whether it's going in your direction. If you want to use stop-loss manually, you can put it above or below the candlestick formation with some buffer, and you can cinder minor support and resistance levels. On the other hand, you can use the 20 days Average True Range as a stop loss level.
To determine the take profit level, you need to consider how strongly the price is moving within the trend. As we know, impulsive pressure indicates that the price may break near-term support or resistance levels. In that case, you can extend the take profit level. On the other hand, you can book your profit if you see the price to stall at the support or resistance levels.
Trade management is a crucial part of this trading strategy as you need to react with the market context despite just following a set and forget rules. As we know, the forex market is ever-changing. Therefore, we need to go with the flow of it.
Want to trade Forex using Momentum trading strategy with a regulated broker? Open a live account with AtoZ Markets approved Forex brokers:
Example of the Best Momentum Trading Strategy
In this section, we will see how you can take the trading entry considering the currency pair has the most energetic bearish movement from the last 13 weeks.
In the example of the forex momentum strategy, we can see the price rejected from the dynamic level of 20 EMA with an hourly close below it. Moreover, the RSI is moving between the 50 to 30 level and pointing to the downside. As a result, the price created a new lower low and walked down towards the direction that we have found in our excel worksheet.
Summary
If we summary the total process it would be like this-
- Identify market direction by calculating the market momentum of the last 13 weeks.
- Use the hourly candle and dynamic level of 20 EMA to follow the direction with an appropriate candlestick pattern.
- Set stop-loss based on price action or ATR.
- Set take profit based on the power of market movement.
Make sure to follow a proper money management system that matches with your personality. Moreover, do not take more than 2% risk per trade.
Should you trade Forex using Momentum trading strategy on your own at all?
Before you start trading with Momentum trading strategy, you'll want to read this.
Our in-house trading expert Dr Yury Safronau, PhD in Economic Sciences, gives you daily his best forex, metals, and cryptocurrencies to buy and sell signals right now.
His trading strategies which are based on non-linear dynamic models have achieved more than 65 000 pips of profits since 2015. And right now there are some very strong buy and sell signals across several markets you don't want to miss.
Want to see which ones?