Detailed explanation of momentum strategy: How to truly follow the trend in trend changes?

Find trading strategies that suit you are undoubtedly the top priority for every trader to pursue success. A strategy that fits your personal style can help you make precise decisions in complex and changing markets and effectively avoid risks. Today, EagleTrader will take you to explore a strategy that is popular among trend traders – momentum strategy, revealing how it can help you improve your trading skills and achieve effective operations of “going with the trend”. So, how to apply the momentum strategy?

What is the momentum strategy

Momentum strategy, as the name implies, is to trade based on the current trend of the market. This strategy believes that once a market forms a certain trend, it will often last for a period of time, so traders should enter the market in the early or mid-term trend formation and follow the trend until the trend reverses. In short, the momentum strategy is to “go with the flow”.

In the foreign exchange market, the core of momentum strategy is to identify and grasp the main direction of the market’s movement. Traders usually use technical indicators such as moving averages, relative strength index (RSI), etc. to judge market trends. For example, when the short-term moving average crosses the long-term moving average to form a golden cross, it is considered to be an upward trend; on the contrary, a dead cross is regarded as a signal of a downward trend. In addition, traders will also pay attention to market volume, breaking through key resistance/support levels and other signals to confirm the strength and sustainability of the trend.

How to use momentum strategy

1. Identify trends:

The first step in the momentum strategy is to identify market trends. Traders can observe price charts and combine technical indicators to determine whether the market is in an upward trend, downward trend or horizontal fluctuation. In an uptrend, the overall price of the currency pair is rising, so momentum traders enter long trading to take advantage of the uptrend. In a downtrend, the overall price is falling, prompting traders to enter short trading to sell the pair and buy back at a lower price.

1. Select entry point:

After determining the market trend, traders need to choose the appropriate entry point. This usually occurs when the trend is just forming or strengthening. For example, when the short-term moving average crosses the long-term moving average to form a golden cross, traders can consider entering the market and going long. At the same time, traders will also confirm the effectiveness of the entry point based on signals such as trading volume and breaking through key resistance levels.

1. Set stop loss and take profit:

In momentum strategies, risk management is crucial. Traders need to set a stop loss point before entering the market to limit potential losses. At the same time, based on the strength and sustainability of the market trend, traders will also set reasonable take-profit points to ensure timely exit from the market before the trend reversal.

1. Continuous monitoring and adjustment:

After entering the market, traders need to continuously monitor market dynamics and adjust their strategies in a timely manner according to market changes. For example, when market trends show signs of reversal, traders should close or adjust positions in time to avoid the loss being expanded.

Example:

Taking EUR/USD (EUR/USD) as an example, suppose that traders observe that the pair is in an upward trend. Through technical analysis, traders found that the short-term moving average has crossed the long-term moving average to form a golden cross, and the trading volume is also increasing. Based on this information, the trader decided to enter the market and go long.

After entering the market, the trader sets reasonable stop loss and take-profit points and continuously monitors market dynamics. As the market trend continues to develop, the trader obtains considerable returns. However, when the market shows signs of reversal, the trader closes the position in time to avoid potential losses.

Momentum strategy can capture the main direction of the market and thus obtain considerable returns in the trend. The strategy is relatively simple and easy to understand. As long as the trader sets stop loss and take-profit points, he can effectively control risks. This strategy is suitable for traders of all levels.

However, when the market trend suddenly reverses, traders may suffer significant losses if they fail to close or adjust their positions in time. Excessive trading and blind pursuit of rises and sells falls are also common mistakes for momentum traders. Therefore, investors need to be cautious when applying momentum strategies and conduct sufficient risk management in order to better control this trading strategy and use it freely.