A guest post by Ahmad Hassam
Many new forex traders lack the patience to wait days for a trade to develop. These types of traders want the trade to turn into a profit within minutes of entering into the trade. If it doesn’t, they usually abandon the trade as they lack the patience to follow it through. These type of traders are more than happy to make 10 pips multiple times a day instead of making something like 100-200 pips in a trade with the potential of the trade going against them in the beginning.
For these type of traders momentum trading is the best forex trading strategy. The aim of this short term momentum forex trading strategy is to hit the profit target as early as possible. This is achieved by entering the market long or short when the momentum is on your side.
In this short term momentum forex trading strategy, we will be using the 20 day Exponential Moving Averages (EMA), the 100 day Simple Moving Average (SMA) and the Moving Average Convergence Divergence (MACD). The exponential moving average places more weight on the recent price action as compared to the simple moving average which is what we will need in this short term momentum trading strategy.
20 day EMA will be the trigger to enter into the trade. The 100 day SMA will make sure that we enter only those trades that are in line with the main trend. MACD will be used to filter out low probability trade setups by gauging momentum. We will be using the default settings for the MACD that are First EMA=12, Second EMA=26 and the Signal EMA=9.
So here are the rules for this short term momentum forex trading strategy: Open the 5 minutes chart. Look for a currency pair that is trading below the 20 day EMA and the 100 day SMA. Wait for the price action to cross above both the 20 day EMA and the 100 day SMA by at least 15 pips.
Enter into a long trade if the MACD has turned positive no more than 5 candles ago. This is done to make sure that you enter into the trade when the momentum has just started to build and is not maturing. Place the stop loss at the low of the candle that broke above both the moving averages.
Take profit on half of the position when the currency pair has moved in favor of your trade by the amount risked and move the stop for the remaining position to break even. This is done to make sure that you only trade with your profits for the remaining positions and you are no longer vulnerable to a loss. Trial the stop for the rest of the position with a 20 day EMA minus 15 pips!
Similarly, if you find a currency pair trading above the 20 day EMA and the 100 day SMA. Wait for this currency pair to start trading below the 20 day EMA and the 100 day SMA by at least 15 pips. Enter into a short trade if the MACD turns negative no more than five candles back. Place the stop loss at the high of the candle that broke the moving averages.
Take profit on half of the position when the currency pair has moved in favor of the trade by the amount risked and move the stop for the rest of the position to break even. Trail the stop for the rest of the position with 20 day EMA plus 15 pips!