Long-term Stock Trading Strategies – Some currency traders are very patient and like to wait for the perfect setup, while others need to see movement immediately or they will abandon their positions. These impatient souls make perfect momentum traders because they wait for the market to become strong enough to push the currency in the desired direction and hold the momentum in hopes of an extension.
However, once the movement shows signs of losing steam, the impatient trader will also be the first to jump ship. Therefore, a true momentum strategy should have solid exit rules to protect profits while at the same time being able to ride as much as possible in the expansion movement. Momo’s 5 Minute Strategy is just that.
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The five-minute momo looks for momentum or a momo breakout on very short (five-minute) charts. First, traders place two technical indicators available in many software packages and charting platforms: the 20-period Exponential Moving Average (EMA) and the Moving Average Convergence Divergence (MACD). The EMA is chosen over a simple moving average because it gives more weight to recent moves, which is necessary for quick trading momentum.
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While the moving average is used to define the trend, the MACD histogram, which helps us measure momentum, is used as a secondary indicator. The settings for the MACD histogram are the standard settings used by most charting platforms: EMA = 12, second EMA = 26, signal line EMA = 9, all using close prices.
This strategy waits for a reversal trade, but takes advantage of the setup only when momentum supports the reversal enough to create a larger breakout extension. The position is issued in two separate parts; the first half helps us lock in profits and make sure we never turn a winner into a loser, and the second half allows us to try to capture what could be a very big move without risk because the stop has been moved to breakeven. Here’s how it works:
Our first example above is EUR/USD on March 16, 2006, when we see the price moving above the 20-period EMA and the MACD histogram crossing the zero line. Although there were several occasions when the price tried to rise above the 20-period EMA between 13:30. and 2:00 p.m. ET, the trade was not executed at that time because the MACD histogram was below the zero line.
We wait for the MACD histogram to cross the zero line and when it does, the trade is triggered at 1.2044. We entered at 1.2046 + 10 pips = 1.2056 with a stop at 1.2046 – 20 pips = 1.2026. Our first target is 1.2056 + 30 pips = 1.2084. It was activated after about two and a half hours. We exit half the position and retrace the other half to the 20-period EMA minus 15 pips. The second half ended at 1.2157 at 9:35 p.m. ET for a total trading gain of 65.5 points.
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The next example (above) is USD/JPY on March 21, 2006, where we see price moving above the 20-period EMA. As with the previous EUR/USD example, there were also some instances where the price crossed the 20-period EMA before our entry point, but we did not accept the trade because the MACD histogram was below the zero line.
The MACD came back first, so we waited for the price to cross the 10 pips EMA and when it did, we entered the trade at 116.67 (the EMA was at 116.57).
The math here is more complicated. The stop is at the 20-EMA minus 20 pips or 116.57 – 20 pips = 116.37. The first goal is the entry and risk amount, or 116.67 + (116.67- 116.37) = 116.97. It will launch in five minutes. We exit half the position and retrace the other half to the 20-period EMA minus 15 pips. The second half ended at 18:00 with a score of 117.07. ET for a total average trading profit of 35 points. Although the profit is not as attractive as in the first trade, the chart shows a clean and smooth movement that shows that the price action is following our rules.
Briefly, our first example is NZD/USD on March 20, 2006 (shown below). We see the price crossing below the 20-period EMA, but the MACD histogram is still positive, so we wait for it to cross below the zero line in 25 minutes. Our trade was then initiated at 0.6294. As with the first USD/JPY example, the math in this case is a little messy because the moving average crossing does not occur at the same time that the MACD has dipped below the zero line, as in our first EUR/USD example. As a result, we enter 0.6294.
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Our point is the 20-EMA plus 20 pips. At the time, the 20-EMA was at 0.6301, so we placed our entry at 0.6291 and our stop at 0.6301 + 20 pips = 0.6321. Our first target is the entry price minus the amount at risk or 0.6291 – (0.6321- 0.6291) = 0.6261. Two hours later, the goal was scored and the second-half break was brought to a goalless draw. We continue to track the second half of the position through the 20-period EMA and 15 pips. The second half then closed at 0.6262 for a total gain of 29.5 points from the trade.
The example above is based on an opportunity that occurred on March 10, 2006 in GBP/USD. On the chart below, the price broke below the 20-period EMA and we waited 10 minutes for the MACD histogram to move into negative territory, thus triggering our entry order at 1.7375. Based on the rules above, when the trade is initiated, we set the stop at the 20-EMA plus 20 pips or 1.7385 + 20 = 1.7405. Our first target is the entry price minus the amount at risk, or 1.7375 – (1.7405 – 1.7375) = 1.7345. It will be launched soon after.
We continue to track the second half of the position through the 20-period EMA and 15 pips. The second half of the position was finally closed at 1.7268, for a total profit from the trade of 68.5 points. Coincidentally, the trade was also closed at the very moment when the MACD histogram returned to positive territory.
As you can see, the five-minute momo trade is a very powerful strategy for capturing momentum-based moves. However, this doesn’t always work, and it’s important to study an example where it didn’t work and understand why it did.
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The last example of a Momo five-minute trade was EUR/CHF on March 21, 2006. As seen above, the price broke below the 20-period EMA and we waited 20 minutes for the MACD histogram to move into negative territory, placing our entry order at level 1. 5711. We set our stop at the 20-EMA plus 20 pips or 1.5721 + 20 = 1.5741. Our first target is the entry price minus the amount at risk or 1.5711 – (1.5741 – 1.5711) = 1.5681. The price is trading below 1.5696, which is not low enough to reach our trigger. It continued to reverse course, eventually reaching our stop, resulting in a total loss on the trade of 30 pips.
Using a broker that offers charting platforms with the ability to automate entries, exits, stop-loss orders, and trailing stops can help when using strategies based on technical indicators.
When trading the five-minute momo strategy, the most important thing to watch out for is trading ranges that are too narrow or too wide. During quiet trading hours, when the price hovers around the 20-EMA, the MACD histogram can reverse, causing many false signals. Alternatively, if this strategy is executed on a currency pair with too wide a trading range, the stop may be reached before the target is triggered.
This trading strategy looks for surges of momentum on short-term 5-minute currency trading charts that a market participant can take advantage of and then immediately exits when momentum begins to wane.
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The 5-minute Momo strategy is used by currency traders who want to take advantage of short-term momentum swings and can therefore be used by day traders or other short-term market players.
Scalping is the process of entering and exiting trades several times a day to make a profit. The process of scalping in foreign exchange trading involves regularly moving in and out of currency positions in order to make a profit. The 5 minute trading strategy can be used to help execute such trades.
Momo’s 5-Minute Strategy allows traders to profit from short-term momentum in currency pairs, while also providing the tight exit rules needed to protect profits. The goal is to recognize the change when it happens, open a position, and then rely on risk management tools like trailing stops to profit from that move, rather than jumping right in. As with many systems based on technical indicators, results will vary depending on
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