Trade the Momentum - Forex Trading System

TradetheMomentumByLaurentiuDamir

Copyright©2012LaurentiuDamir

Allrightsreserved.Nopartofthisbookmaybereproducedortransmittedinanyformorbyanymeans,electronicormechanical,includingphotocopying,recording,oranyinformationstorageandretrievalsystem,withoutpriorwrittenpermissionoftheAuthor.Yoursupportofauthor’srightsisappreciated.

Tableofcontents

IntroductionTimeframeFirst16hoursofthetradingweekMomentumThe4hourschartChartexamplesTradingsystemstepbystep

IntroductionThisisasimplebutveryefficienttradingstrategythatcanmakeyou200pipsandmoreperweekeasily.Itcombineselementsofmarketprofilewithpriceactionsetups.Itisatrendfollowingstrategythatidentifiesacleardirectionofaspecificpairandastrongmomentumandtriestocapitalizeusingpriceactionsetupsthatareinlinewiththemomentum.Itworksextremelywellonthefollowingpairs:Eur/Usd,Gbp/Usd,Eur/Jpy,Gbp/Jpy,Aud/Usd,Usd/Chf,Eur/Chf.Thesepairsareveryliquidandatthesametimetheyhaveverygoodvolatility.ItworkswellalsowiththeotherliquidpairslikeUsd/Jpy,Eur/Gbp,Usd/CadbutthesehavelowvolatilityandIprefernottotradethemwiththisstrategy.Youwillseelateronwhyvolatilityisimportant.Let’sgetstraighttothedetailsofthistradingsystem.

TimeframeWewillusetheweeklycandlestickcharttoidentifydirectionandmomentumofprice,wewillthenusethe4hourscandlestickcharttoidentifytradingsetupandalsothe15minutescharttohelpusenterthetrade,setastoplossandatakeprofitlevel.Also,makesurethatyourbrokerchartsarebasedontheNewYorkclosingtime.Ifnot,openademoaccountwithabrokerthatoffersNewYorkclosingchartslikeFxddorFxlite.

First16hoursofthetradingweekThisisthemostimportantcomponentofthetradingsystemanditisderivedfromthemarketprofiletechnique.Marketprofileisaconceptthatwasinitiallyusedtotradethestockmarketbutinrecentyearshasbeenadaptedalsoforthe24hourmarketsliketheforeignexchangemarket.Itisbasicallyadifferentchartingtechniquethatcanhelpatraderbetteridentifyatwhatlevelpricehastradedthemostinagiventimeperiodandtoestablishavalueareaforaspecificstock/forexpairwhichisconsideredtobetherangewhereover70%ofallthetradesinthatspecifictimeperiodtookplace.Thisvalueareaactsasaverystrongzoneofsupportandresistance.Anotherconceptofmarketprofileiscalledtheinitialtradingrangewhichistheveryfirsthouroftradingofanygivenday.Thisisthestapleofthemarketprofilechartandallthoseothercomponentsofitderiveinonewayoranotherfromtheinitialtradingrange.ThisinitialtradingrangeiswhatweareinterestedinwiththisstrategyandIhaveadaptedittotheforeignexchangemarket.Tocutalongstoryshort,aftersometimeofstudyingtheforexchartsIhavecometotheconclusionthattheinitialtradingrangeinforexarethefirst16hoursofthetradingweek.Theboundariesofthesefirst16hoursactasverystrongsupportandresistancezones.LetmegiveyousomechartexamplessoyoucanbetterunderstandwhatImean.

MomentumWetalkedaboutmomentumearlierandIsaidwewillusetheweeklycharttoseeifthereismomentuminagivenpair.WhatImeaniswewilllookforastrongdirectionalweeklycandlestickwithsmalltailandacloseatornearthehighorlow.Letmeshowyouachart:

Youcanseeonthechartabovethatallthecandlespointedoutarelarge,haveverylittletails/wicksandclosenearoratthehighestorlowestpointoftheirrange,dependingofthedirectionofthecandle.Ifthereisastrongbullishcandlewewantittocloseatornearthehigh,ifthereisastrongbearishcandlewewantittocloseatornearthelow.Abullishcandlethatclosesatitshighsignifiesthatwehaveacleardirectiononthatpair.Thelargesizeofthatbullishcandlemeansthatwehavealsoamomentum,priceisgoinginonedirectionwithstrongconviction,thebuyersareincompletecontrolofthepair,andtheyhavenoprobleminpushingthepricehigher.Whensuchaweeklycandleformsthereisagoodchancethatinthefollowingweekpricewilltradeinasmallrangeforashortperiodoftimeandthentakeoffagaininthedirectionofourlargebullishcandle.Thesamereasoningisvalidforastrongbearishcandle.

The4hourschartAsIsaidbefore,weusethe4hourcharttofindpriceactionsetupsafterwehaveidentifiedthedirectionandmomentumontheweeklychart.The4hcandlestickchartshouldhaveperiodseparatorsonitsoyoucanseewhereaweekendsandthefollowingbegins.Alsoonthe4hchartwewillplotthe200EMA(exponentialmovingaverage).Youprobablyknowthatthismovingaverageisthemostfollowedbythemajorityoftradersandasaconsequence,priceveryoftenreactswhenitisatornearthe200EMAsowewillincorporateitinourtradingsystem.LetmegiveexampleswithchartstobetterunderstandwhatImean:

Nowlet’sseewhattherulesthatwehavetorespectarewhenwefindatradingsetup.Afterthefirst16hours(thefirst44hcandles)ofthetradingweekhavepassedwedrawonthecharttwohorizontallines,oneattheupperlimitofthefirst16hoursandtheotheratthelowerlimit.Wethenwaitforpricetobreakoneoftheselineswhichmeansthatwewaitforastrongdirectional4hcandlethatclosesbeloworabovethelineliketheoneinthechartabove.Thiscandleshouldresembletheonesontheweeklychartwetalkedaboutearlier.Itshouldhavealargebodyandclosenearthehighorlowtogiveusthemomentumweneed.Afterthis

hashappenedwewillgotothe15minutescharttoenterthetradeandsetstoplossandtakeprofitlevels.Wehavetwoveryimportantrulesthatwehavetotakeintoaccount:thepriceactionsetuphastotakeplaceaboveorbelowthe200EMA,itshouldnotintersectinanywaywiththemovingaverage.Theotherimportantruleisthattherangeformedbythefirst16hoursshouldbeatleast90-100pipsinsize.Thebiggerthebetter,rememberthepairswetradewiththisstrategyarevolatileandtheyusuallyhavenoproblemdevelopinganinitialrangeof100pipsinsize.Wedonottradesetupssmallerthanthis.

Chartexamples

Intheexampleabovewehavelookedattheweeklychartandhaveseenthatthetradingweekbeforethisformedastrongbearishcandlewiththeclosenearthelowofthattradingweekwhichgivesusthedirectionandmomentumweseek.So,inviewofthiswewillbelookingforapriceactionsetuptosellthispairbecauseaccordingtotheweeklychartwehavecleardirectiontothedownsideandwehavemomentumalso(sellersarestrongatthemoment).Inconsequencewegothe4hchartandwaitthat44hourcandleformanddrawthehorizontallinesatthelowerandhigherlimit.Afterpricetradesinourrangeforawhileitmakesamovedowntobreakourrangebutfailstoclosebelowandretraces.Thenextcandlethoughhasmoresuccessandbreaksourrangeandclosesatitslowaswecanseeonthechartpointedoutwiththeredarrow.Thisisverygoodbecauseitconfirmswhatwealreadyknowfromtheweeklychart,thatwehavestrongmomentumtothedownside.Thismeansthatwehaveasetupandwegotothe15minutescharttoenterthetrade:

Let’sseewhatwedidhere.Afterthesetuphasformedonthe4hchartwegotothe15minuteschartandwealwaysenteratradeinthedirectionofthebreakoutcandleandweenterexactlyatthelowerlimitofourrange.Inthiscasepricebrokethroughourrangewithconvictiontothedownside,weenterapendingselllimitorderattherangelimitandwaitforthepricetocomebackuptoretestthatlevelbeforeitgoesdownagain.Theideahereissimpleandyouprobablyknowthisalready:thatlowerlimitoftherangerepresentedbythehorizontallineinthechartaboveisnowaverystrongresistancezoneonceithasbeenbroken.Wesawatthebeginningofthisstrategyhowpricebouncesoffoftheselines.Likeanystrongsupportorresistancezonepriceveryoftencomesbacktoittoretestitbeforeitcontinuesitswaydown.Asyoucanseeintheexampleabovethatisexactlywhathappenedandthishappensinthevastmajorityofsituationslikethese.Sopriceclimbedbackuptotheresistanceandoursellordergottriggered.Stoploss:wealwayssetourstoplossatthelastminorlowerhigh(braketothedownside)orhigherlow(braketotheupside).Inourexampleabovethestoplossissetatthatlastlowerhigh(whichactsasaminorresistance)thatpricemadejustbeforethebreakoutofourrangetookplace.Beforeweenterthetradewefirstlooktoseeifwehavealowerhighorhigherlowneartheentrytouseitasastoplosslevel,ifthereisn’tanyneartheentrylevel

wedonotenterthetradebecausewedonotwanttotradewithabigriskandlowreward.Ifthelastminorswing/resistancewherewecanhangourstoplosslevelisata100pipsdistanceofourentrypriceandthetakeprofitisonly70pipsthenwedon’tenterthetradebecausetheriskwouldbegreaterthanthereward.Thetakeprofitlevelwillalwaysbeatthebreakoutcandlesloworhigh.Inthiscasethetakeprofitisatthelowoftheinitialbreakoutcandle.Let’sseesomeotherexamples:

Herewesawastrongbullishcandleontheweeklychart,wegotothe4hchartandseethattherangehasmorethan90pipsanditdoesnotintersectwiththe200EMA.Afterwemakeallthearrangementsonthechartandhopeforabullishbreakoutoftherange,itfinallyhappens.Weseeastrongbullishcandlethatcloseswayoutsidetherangeandthismeanswehaveasetup,wegotothe15minuteschart.

Weenterabuylimitorderattheupperlimitoftherangenowturnedsupport,thestoplossatthelastminorswingandthetakeprofitatthehighoftherangebreakoutcandle.Remembertotradeonlyifthebreakoutoccursinthedirectionshowntousbytheweeklychart.Becausethelastweekbeforethisformedastrongbullishcandlewithstrongmomentumweonlytradeiftherangebreakouthappenstotheupside.

Bearishcandlewithmomentumontheweeklychart,rangewith90pipsormore,doesnotintersectwiththe200EMA,strongbreakouttothedownside.

Seehowpriceclimbedbackupandretestedtothepipourrangeboundaryandthencontinueddown.

Let’sseethisone.Everythingisgreathere,strongbreakout,retestandallthewaydown,butlet’shavealookatthe15minuteschart

Eventhoughthepriceactionsetupwasperfectonthe4hourchart,whenwegotothe15minutescharttoenterthesellorderwedonotfindalogicalzonewherewecanplaceourstoplosssothatthepotentialrewardwillbebiggerthantheriskweassume.Wedonottradethissetup.Thisishowyoumakeconsistentprofits,withsolidmoneymanagementrules.Ifriskisgreaterthanthepotentialrewardwedonottrade.Anotherimportantthingaboutthe4hsetup:therangebreakoutusuallyoccursTuesdayorMondayevening.Theretestoftherangeboundaryshouldcomequitequickusuallythesamedayorthenextdayafterthebreakout.Thefasterthepricecomesbacktoretesttheboundarythestrongertheprobabilitythatthattradewillbeawinner.IftheretestcomeslateinthetradingweeklikelateThursdayorFridayafterpricehastraveledawayfromtherangewithoutaretestthendon’ttaketrade.HereiswhatImean:

Amassivebreakoutoccurshere,pricegoesfarawayfromourtradingrangeandtheretestcomeslateinthetradingweek.Thiswouldhavebeenaloser.Don’ttradethis.

Isaidearlierthatoneoftheimportantrulesofthisstrategyisthatthepriceactionsetuponthe4hchartshouldnotintersectwiththe200Ema.Thisisexactlywhatisgoingonhereanditwouldhavebeenalosertrade.Don’ttradethis.

Wehaveherethesamesituation.Priceshouldbeaboveorbelowthe200EMAatalltimes.Don’ttradethis.

Intheexampleabovepricefirsttriedtobreakoutoftherangebutdidwithonlyafewpips.Thisisnotavalidbreakoutoftherange,wedon’ttradethis.Wehavetowaitforavalidstrongbreakoutlikethatonemarkedinthechart.Remember,forabreakouttobeconsideredvalidthecandlehastoshowcleardirectionandmomentum.

TradingsystemstepbystepAftertheendofthetradingweek,gototheweeklychartandseeiftheweekthatjustendedmadeastrongdirectionalcandlewithmomentumlikewetalkedaboutatthebeginningofthisbook.Ifthereisone,yougotothe4hchartanddrawhorizontallinesattheupperandlowerlimitsofthefirst16hoursofthecurrenttradingweek.Alsoinsertonthechartthe200EMA.Youwillbelookingtotradeonlyinthedirectionofthelastweeklycandlestick.Iftherangeofthefirst16hoursinthetradingweekissmallerthan90pipsdonottrade.Waitfornextweekonthatpair.Iftherangeisatleast90pipsyouwillconsiderapotentialtradeonlyiftherangeandthebreakoutcandledoesn’tintersectwiththe200EMA.Ifitdoesintersectdonottrade,waitfornextweek.Ifeverythingisokaythenyouwaitforastrongbreakoutcandleoutsidetherangeinthedirectionofthelastweeklycandlestick.Ifthisdoesn’thappendon’ttrade.Ifithappensyougotothe15minutescharttoenterthetradelikeshownintheabovechartexamples.Thisisit.IntheendIwouldliketoapologizeifIsoundalittletorigidinmyexplanationsandifthereareanymisspellings.Englishisnotmyfirstlanguage.IamdoingthebestIcan.Thankyouandhappytrading.IfyoufindthatthisaddsvaluetoyourtradingpleaseconsiderwritingareviewofthebookonAmazon.Itdoesnothavetobelong,justafewwordstostateyouropinionaboutthetradingsystempresentedinordertohelpotherpeoplemakemoreinformeddecisions.Pleaseemailmeafterwardsatdamirlaurentiu@yahoo.comandyouwillreceivethePDFversionofthise-booksothatyoucanreaditmoreeasilyandprintthecontentsonpaperifyouwant.Also,ifyouwanttocombinethisstrategywithaverypowerfulpriceactionstrategyyoucancheckout“TradethePriceAction”,forexprice

actionstrategywithawinningrateofover90%or“FollowPriceActionTrends”,atradingsystemthatcandeliverthousandsofpipsridingpriceactiontrendsoftheonehourchart,oraverypowerfuldaytradingsystemthatcanmakemorethan1000pipspermonthtradingpricepatterns.Allmytradingmethodsarelistedbelow.Link:TradethePriceActionLink:FollowPriceActionTrendsLink:DayTradingForexwithPricePatternsLink:DayTradingForexwithS&RZonesLink:50PipaDayForexStrategyLink:ForexRangeTradingwithPriceAction