Price action is a trading technique that describes the characteristics of the price movements of a security. It allows a trader to read the market so he can make subjective trading decisions according to the recent and actual price movements. Momentum is a simple and unique technical analysis indicator that is a close replica of price action and useful for traders worldwide. Price action trading with momentum provides incredible insights into future price levels.
Strategies for price action trading with momentum
Higher Highs and Lower Lows
Bullish trends are defined by a range of higher highs and lower lows. As long as it continues, the price continues to rise. It makes no sense to fade the trend. The perk of an oscillator is that it can be used to discount the price movement. For example, one of the two prices of the oscillator is the actual price and it is poised for making a false move. The oscillator plots current values by using past price action. So, its move is more trusted than the actual price by traders, especially when the price and the oscillator are too similar.
Hence, the rules of a trend applied to pure price action work can work even better when it is applied to the oscillator. So, the attention switches to the Momentum oscillator instead of focusing on the price action for forming a series of higher highs and higher lows. Trend trading on Momentum is a great way if you want to make a profit the strongest trends within the market. The trading strategy works on all currency pairs and all timeframes.
Volatility Indicator
Momentum can also be used for trading as a volatility indicator. Since the Momentum indicator reflects the actual price action closely, it can be used to spot volatility breakouts. Traders take it as a confirmation of the range ending and the trend resuming. The pivotal is the 100 level where it all starts. The indicator needs to be edited in a way so two new levels 101 and 99 can be added. This way, a tight area reflecting close ranges is created. Traders need to imagine that the price action remains flat when the Momentum oscillator stays flat at the 100 level.
The market is open 22/5, so the price always fluctuates. So, the Momentum fluctuates around the 100 level as well. Therefore, we can create an area between the 101 and 99 values defining ranges by adding these two levels. The objective is spotting breakouts from the area which is a sign of increased volatility. In other words, traders keep the positions open to avoid the consolidations in the market or when the price action is too slow. However, they can do it only when the Momentum indicator is either below or above the area. It is a confirmation of the fact that the market is very volatile and moves fast.
Divergences
It is not the task of oscillators to show trading conditions. Instead, traders view the differences between the oscillator and the price. These divergences are formed exactly before significant tops and bottoms most of the time. Therefore, trading divergences are implied by trading tops and bottoms with Momentum. Higher highs and lower lows also play a major role here. The objective is sticking with the Momentum oscillator when the price action is interpreted. It is observed that the price makes two consecutive higher highs after the Momentum shows trending conditions on the daily GBPUSD chart. However, the second high is not confirmed by the Momentum indicator. Hence, a divergence is shown. When you are trading with Momentum divergences, it means that you need to buy after a bullish divergence and sell after a bearing one but be careful as it is not applicable at all costs.
For example, the entry must be when the Momentum indicator has crossed below the 100 line as that is when the price action is turned bearish. If this rule is not followed, then it leads to an odd situation, like a bearish divergence with the price can be formed by the Momentum oscillator at the start of the trading year. When the Momentum has not yet crossed into the bearish market, it is foolish to jump on the short side. Instead, it shows potential bullish conditions when it remains above the 100 level. Therefore, traders must be patient because trading with Momentum divergences gives plenty of false alarms.
Momentum and RSI
The best way of trading with Momentum is by combining it with another oscillator as it completes the trading. As you may already know, the current close price is compared by the Momentum oscillator to the price from fourteen periods before. So, it has two values only. However, other oscillators such as the RSI considers all the data derived from the previous fourteen candlesticks and then plot a corresponding value to the current price.
So, a combination of the RSI and the Momentum oscillator provides a unique approach to technical analysis. However, the “rules of engagement” must be set first. The right way to do this is by keeping the 101 and 99 areas as defining ranges for the Momentum indicator. This strategy is applied to trade the breaks out of the range but filter them by using the RSI. The main characteristic of the RSI is that it displays overbought and oversold levels.
The indicator is predefined for coming with the levels with two horizontal lines at the 30 and 70. Values that are lower than 30 show oversold conditions. Similarly, Values that are bigger than 70 show overbought conditions. Generally, traders buy oversold and sell overbought. However, this strategy works only when the market is in a range. When it breaks out of the range or it is trending, the oversold and overbought areas do not work anymore. Instead, a trend is started by the price that tests even more experienced traders that are tempted to fade it. If the same 14 periods are used for the RSI, then two indicators are shown on the screen and they plot almost the same values. Therefore, you need to use a faster RSI than the momentum to achieve the competitive advantage ahead of the market.
Final thoughts
Trading with Momentum follows the price action closely and keeps the traders close to the market movements. It also filters signals that other technical indicators like the RSI give and helps the traders to do the right thing. Moreover, an equilibrium point is provided by it as the 100 level acts as more than the classic pivot point. So, you may consider using this indicator with incredible trading setups as well and see the difference yourself.
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