I’m frequently asked why we call our algo the “Momentum System”.
But first, let’s talk about what momentum actually is for a minute…
Think of Momentum as a similar concept as “inertia”. In other words, when the market breaks-out of a zone or starts trending in one direction, it has a tendency to continue in that direction – until acted upon by an opposing force. That opposing force is usually participants that step in when things get stretched too far in one direction.
Like everything else in the markets, momentum can be measured on various timeframes. On a trending day you might say there was momentum all session. Sometimes there are intraday “momentum thrusts” which are quite common. We often refer to a momentum thrust as an impulse move. It’s when the buyers or sellers overwhelm the other side and the market experiences a significant move. It can be quick and come out of nowhere, or it can build throughout the session.
There are always varying degrees of Momentum in the market at any given time, and it’s essentially the reason the market moves up and down. When a wave of buy or sell orders hits the market, that creates momentum.
Here’s how Investopedia defines Momentum:
Momentum is the rate of acceleration of a security’s price—that is, the speed at which the price is changing. Momentum trading is a strategy that seeks to capitalize on momentum to enter a trend as it is picking up steam. Simply put, momentum refers to the inertia of a price trend to continue either rising or falling for a particular length of time.
Why did the market go up? More buyers than sellers.
Momentum typically occurs in the direction of the prevailing trend. We see this all the time. The market is drifting lower and each rally makes a lower high and then suddenly a wave of selling comes in and we get a big momentum down thrust.
When we first developed our range breakout algo we decided to call it the Momentum System because the level of momentum in the market plays a crucial role in the amount of directional follow-through the price makes. Sometimes we call it the Momentum Breakout System because it’s also a Range Breakout system.
The momentum system assumes that once the buyers or sellers are able to break price out of the opening range area, there will be enough “follow-through” or “momentum” in that same direction to move the price to the first “easy to hit target”. On days where there’s good directional momentum, price carries all the way to Target 2, which is a significant distance from the entry. The more momentum in the market the better – which holds true no matter what style of trader you are.
Friday 2/23/24 was a great example of what we meant by “Momentum” when we originally named the system so I marked up the chart as an example of the concept. The move that hit Target 2 was actually more of a “momentum thrust” as I mentioned above.
You can see how the price clanged around in a 10-point range after the cash open for about an hour. As the downside momentum started picking up, the system gave a short alert at 5111.25. At 10:45 the Alert triggered-in at 5110.25 and as the downside momentum gathered steam, Target 1 got hit shortly thereafter.
The very next 5-minute price bar is where the real “momentum” kicked-in and you can see where it hit Target 2, which was -12.50 points below the Entry.
Since the 5-minute opening range was only 7.75 points – which was relatively narrow – Target 1 was only 3.75 points and Target 2 was just 12.50 points. But adding those together gave a respectable 16.25 point gain on the Alert.
And the best thing about sessions like Friday where there’s good directional “momentum” early on, is that the system was basically “done for the day” before lunch time. Assuming you’re trading 2 contracts and shooting for the two targets, once both targets get hit then that’s it – you’re out. There won’t be any more alerts that session and the system will go offline once price and the trailing stop converge. (the red dashed line was the trailing stop level).
Momentum comes in different forms.
Some sessions like Friday the move happened fast and that big thrust down pushed through Target 2 quickly. Some sessions the price drifts towards the targets over a period of time and maybe Target 1 gets hit in a short amount of time but it takes most of the day for price to work its way to T2. Other days the price might hit the first target but never have the follow-through “momentum” to make it to T2. That’s where the trailing stop comes in.
The system is designed so that once Target 1 gets hit, the trailing stop “ratchets” to an equal distance from the Entry, so the trade is essentially at breakeven. So when we take a trade we just need a little bit of “forward momentum” to get to breakeven.
The Power Emini Momentum System is designed to capitalize on both quick bursts of momentum and more persistent momentum moves that create trends.
We have to trade what the market serves up from day to day.
Some days the market just drifts and there’s really no momentum to speak of. Choppy, listless, dull, non-trending days are tough to trade no matter what type of system you’re using or what your strategy is.
I can tell you from a decade of experience, not everything works all the time. No matter what type of trade setup you use, it’s not going to work in every environment and in every session. All trade setups have a failure rate. When you get into a trade you’re basically looking for “momentum” to carry the price along in the direction of your trade.
Many new traders fail to realize is that the “trade setup” is just one part of the puzzle. Trade management, trailing stops, getting to breakeven, taking partial profits are all just as important as the “setup”. An organized trading strategy should quantify all these components, not just the entry setup. You could have a great entry strategy but if the rest of the pieces of the puzzle aren’t in place, it’s highly unlikely you’ll be successful over the long run because you’ll be flying by the seat of your pants, trying to make snap decisions on every trade.
The concept we use for the term “momentum” makes a lot of sense if you think about it. When buyers or sellers in the market are able to push the price past a certain level – or establish a trend in one direction or the other – they typically have the fire-power to move price “just a little further” in that same direction and that’s why the Momentum System is calibrated so that Target 1 will get hit roughly 75% of the time . In normal markets, once “momentum” starts to build, it tends to feed on itself.
Momentum comes and goes throughout the session and is frequently news driven. Persistent momentum is what creates trends.
Momentum is your friend. The more momentum the better.
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Entry Price – Trailing Stops – Dynamic Targets
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