Take note on the far right of the chart, price action makes a higher high and the Momentum Oscillator makes a lower higher. This is a good quality divergence setup that occurs within a range bound market condition. On the chart above, you will notice that price is in a strong downtrend. There are three Momentum divergence signals noted on the chart. All three proved to be false signals as price action continued to trend to the downside.
This should make you think twice about trading divergences during strong trends. Trading Strategy using Momentum Indicator By now you should have a good understanding of what the Momentum indicator is, how it is constructed, and some of the trading signals that it provides. We will now shift our focus and discuss some trading strategies that we can use when trading with Momentum.
We have already outlined the details of the divergence pattern, so now I will briefly explain what a Zig Zag Pattern is. It consists of three waves — A, B, and C. Wave A is the initial wave of the pattern, which is retracement by the second leg, Wave B. The final wave, Wave C, moves in the same direction as Wave A and must extend beyond it. Firstly, what we are looking for is an overall trending market.
Secondly, we want to see a Zig Zag correction within that trending market. And then, finally we want to wait to see if a divergence formation occurs within the Zig Zag pattern. If we can confirm the divergence between the Momentum indicator and price, then that will be our trade setup. Our actual entry signal will occur on the break of the trend line that extends from the beginning of Wave A and connects to the beginning of Wave C.
We will call this the A-C trend line. As for trade management, we will look to place our stop loss beyond the most recent swing created prior to the A-C trend line breakout. And for the take profit target, we will target an area just inside the beginning of Wave A.
At some point, price action begins to turn up and soon we see a Zig Zag pattern forming on the chart. Also at the same time, we see that a Bearish Divergence pattern is forming as well between the price and the Momentum Indicator. The dashed yellow lines represent the divergence formation. All of this evidence points to a possible reversal, so we want to be positioned to the short side. Recall per the strategy described, we would want to wait until we have a break and close beyond the A-C trend line of the Zig Zag pattern.
You will notice the A-C trend line is marked with a dashed red line. Sometime after the divergence pattern has formed, we have a strong break and close beyond the A-C trendline. This is the entry signal that we are waiting for, and we would want to initiate a short trade here. The stop loss would be placed just above the Pin Bar that was created several bars back.
You can spot this by locating the bar with the relatively high wick to the upside. Just after the entry, price action tested the broken A-C trendline and then moved sharply to the downside. We would exit the trade just before price reaches the beginning of the Zig Zag pattern.
I have noted the take profit target area on the chart. Momentum Divergence with Support and Resistance Regardless of the trading system used, every trader should take the time to understand the fundamental concepts of Support and Resistance. Support levels are areas where price is likely to stall or find demand buying pressure. Resistance levels are areas where price is likely to stall of find supply selling pressure. When a support level breaks, it turns into new resistance. When a resistance level breaks, it turns into new support.
It is important to note that Support and Resistance should be viewed as zones or areas rather than a fixed line. One of the major mistakes that traders make is that they typically only look at one timeframe — their trading timeframe. By doing this, they lose sight of what is going on in the bigger picture and sometimes trade right into a key support and resistance level without even knowing it.
So, it is critical to know where major support and resistance areas are so that you can navigate your trading within that framework. In this next strategy, we will be combining the Momentum indicator using the divergence pattern again, but this time we will trade the divergence off of a key higher timeframe level.
So, if you were trading the 60 minute chart, your key levels would be plotted off the minute chart, which is the next higher timeframe. Or if you were trading the minute chart, your key levels would be plotted off the daily chart. Typically, the higher timeframe will be 4x to 6x your trading timeframe. Once we confirm the divergence between the Momentum Oscillator and price has occurred, then we will consider that a potential trade setup is progressing.
Our actual entry signal will occur on Momentum Indicator crossover. We will need to place a stop loss order in the market. For the stop loss, we will use the most recent swing prior to the Momentum crossover signal. For the exit, we will wait for the Momentum Indicator crossover in the opposite direction. Take note of the solid red line on the chart.
That red line represents key resistance area for the 10 hr. Keep in mind for this strategy, we want to use the higher timeframe to mark major support and resistance levels. As the down move began to subside, prices started to reverse and trade to the upside. Price action put in the first significant top during the up move, and soon after price action was beginning to test the major resistance area.
As price moved into resistance, we were able to notice that a nice divergence pattern was forming as well. This clued us into a potential bearish trade setup. Based on the strategy rules described, we would have to wait for the Momentum indicator crossover signal now before we could execute the trade. And in fact, that signal occurred shortly after the resistance test.
As a result, we would have entered a short position and placed our stop loss order above the recent swing high as noted on the chart. Prices quickly dropped and several days later a crossover signal occurred to the long side on the Momentum indicator. He is the most followed trader in Singapore with more than , traders reading his blog every month So which currency pair do you trade?
But first, I want you to avoid these common mistakes traders make when using the currency strength meter… Do you make these mistakes when using a currency strength meter indicator? Almost none of them tells you the pitfall to avoid when using a currency strength meter. So here are the mistakes to avoid when using a currency strength meter the stuff nobody tells you … Mistake 1: You randomly use a currency strength meter without knowing how it works Now, a currency strength meter is like any other trading indicator.
What if the formula is wrong? Mistake 2: You use the currency strength meter to time your entries Now, a mistake many traders make is to blindly trade based on the currency strength meter. But this is prone to false signals on the lower timeframe. Of course, you can complicate things by adding formulas, weightages to different timeframes, etc.
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