Using Momentum

Filed under: Learn Forex Trading |

 

Using market momentum is a technique that can yield very high probability setups. Unfortunately, many beginner forex traders’ instincts often go against momentum and they try to catch market tops and bottoms. This is a dangerous game to play. A much safer strategy for beginner traders would be to always trade in the direction of the trend, and to go with the momentum of the market and try to ‘ride the wave’, as it were.

 

One way of doing this is by using ‘inside bars’ as a setup strategy. An inside bar is when price, in a specific period of time (such as a 1-hour chart or a daily chart), does not go above or below the low or the high of the previous bar. What you can do when there is a strong trend in play and an inside bar forms is to put an order in at the break of the mother candle in the direction of the trend. A good stop loss would be at the other side of the inside bar mother candle, and of course, you should have a positive risk-reward setup for your target of at least two times your risk.

 

What you are essentially doing by trading these inside bars in the middle of a strong trend is hopping on that momentum and riding it a little way. The aim is not to ride it all the way up until the market turns, but just to hop on for a little while. Going with the momentum of the market will always have a higher probably of success than trading against momentum. Trying to catch market tops or bottoms is very difficult, and is something that should only be really left to the more experienced trader. So to begin with, go with the dominant trend and try to ride some of that momentum. It is the bread and butter of successful forex traders.

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