Momentum Stock Trading System Overview

What is Momentum Trading?
In market terms, momentum is a measure of the velocity of a change in price.  Momentum trading is often used to describe the short term application of trading decisions that accompany periods of high velocity of price change in the markets.  The anticipation of a change in momentum in the markets or for a particular security is often a result of signals from technical indicators or changing fundamentals. It can be event related or tied to a response of global changes. The key focus for Momentum trading is the integrity of the price trend segment that is being traded. While the trend remains intact, traders organize trading strategies based on the current trend and assessment of whether that trend will remain in place over the forecasted period of the trade. A key focus point is on any indications that a reversal of price trend may occur. This may include trendline breaks, changes in underlying fundamentals as well as critical day analysis, which is a forecast of potential reversal points for the major U.S. indices or individual securities with respect to the short segment price trend (3 to 5 day price trend.)

What do you need for Momentum Trading?
To engage in momentum trading, you must have the mental focus to remain steadfast when things are going your way and to wait when targets are yet to be reached. Momentum trading requires a massive display of discipline, a rare personality attribute that makes short-term momentum trading one of the more difficult means of making a profit. Let's look at a few techniques that can aid in establishing a personal system for success in momentum trading.

Techniques for Entry
The impulse system, a system designed by Dr. Alexander Elder for identifying appropriate entry points for trading on momentum, uses one indicator to measure market inertia and another to measure market momentum. To identify market inertia, you can use an exponential moving average (EMA) for finding uptrends and downtrends. When EMA rises, the inertia favors the bulls, and when EMA falls, inertia favors the bears. To measure market momentum, the trader uses the moving-average-convergence-divergence (MACD) histogram, which is an oscillator displaying a slope reflecting the changes of power among bulls and bears. When the slope of the MACD histogram rises, bulls are becoming stronger. When it falls, the bears are gaining strength.

The system issues an entry signal when both the inertia and momentum indicators move in the same direction, and an exit signal is issued when these two indicators diverge. If signals from both the EMA and the MACD histogram point in the same direction, both inertia and momentum are working together toward clear uptrends or downtrends. When both the EMA and the MACD histogram are rising, the bulls have control of the trend, and the uptrend is accelerating. When both EMA and MACD histogram fall, the bears are in control, and the downtrend is paramount.

Refining Entry Points
The above principles for determining market inertia and momentum are used to identify entry points in a precise style of trading. If your time frame of comfort corresponds to the daily charts, then you should analyze the weekly chart to determine the relative bullishness or bearishness of the market. To determine the market's longer-term trend, you can use the 26-week EMA and the weekly MACD histogram on the weekly chart.

Once the long-term trend is gleaned, use your usual daily chart and look for trades only in the direction of the long-term weekly trend. Using a 13-day EMA and a 12-26-9 MACD histogram, you can wait for the appropriate signal from your daily comfort zone.

When the weekly trend is up, wait for both the 13-day EMA and MACD histogram to turn up. At this time, a strong buy signal is issued and you should enter a long position and stay with it until the buy signal disappears. By contrast, when the weekly trend is down, wait for the daily charts to show both the 13-day EMA and MACD histogram turning down. Such an occurrence will be a strong signal to go short, but you should remain ready to cover the short position at the very moment that your buy signal disappears.

Techniques for Exiting Positions
The major reason momentum trading can be successful in both choppy markets and markets with a strong trend is that we are searching not for long-term momentum but for short-term momentum. All markets trend within any given week, and the best stocks to trade are those that regularly exhibit strong intra-day trends. With that in mind, you must remember to step off the momentum train before it reaches the station.

As already mentioned, once you have identified and entered into a strong momentum trading opportunity (when daily EMA and MACD histogram are both rising), you should exit your position at the very moment either indicator turns down. The daily MACD histogram is usually (but not always) the first to turn as the upside momentum begins to weaken. This turn, however, might not be a true sell signal but a result of the removal of the buy signal, which, for the impulse system, is enough impetus for you to sell.

When the weekly trend is down and the daily EMA and MACD histogram fall while you are in a short position, you should cover your shorts as soon as either of the indicators stop issuing a sell signal, when the downward momentum has ceased the most rapid portion of its descent. Your time to sell is prior to the trend reaching its absolute bottom. As contrasted with a carefully chosen entry point, the exit points require quick actions at the precise moment when your identified trend appears to be nearing its end.

As you have probably already noticed, the impulse system of trading on momentum is not a computerized or mechanical process. This is why human discipline continues to hold so much sway on your degree of success in momentum trading: you must remain stalwart in waiting for your "best" opportunity to enter a position, and agile enough in keep your focus on spotting the next exit signal.

Video Tutorial
Review a video tutorial for the Momentum Stocks historical examples at

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