EXPERIENCED TRADERS should be able to tell if today is likely to be a “good” trading day in under 60 seconds…usually in 10.
Am I exaggerating? Not really. It all comes down to asking a question:
“IS MOMENTUM AND TREND ALIGNED TODAY?”
When we conduct our live trading sessions, I show clients how to identify the daily trend and momentum in less than 10 seconds.
Let me emphasise that it is nothing special. We can do it because we know our systems inside out. We have polished our edges into sharp blades with which we carve profits out of the market. Whether you are a daily or intraday chart trader, I strongly encourage you to do the same.
Before we go any further, pause a moment to ask yourself one question:
What is the difference between trend and momentum?
This is more difficult to explain than it looks. Largely, it depends on your system. I call the direction “trend” in this blog post because that is what most people call it. In my own terminology, the trend is the larger move. Within this trend, you can determine smaller waves moving up and down. These waves are the cycles. Sometimes, the cycles are in line with the trend, and sometimes they aren’t.
However, for the purpose of this post, let’s keep things simple:
Momentum: It is the direction in which price showed the greatest acceleration. It is up if there is bull pressure and it is down if there is bear pressure. Momentum very often aligns with the larger, true trend. For our purposes here, it is safe enough to assume that the momentum represents the true trend.
“Trend”: Trend here is the smaller wave movement. When it swings in the direction of momentum, it moves further and more coherently. When it swings against momentum, it moves more uncertainly and usually goes less far.
Great, so what use is this to me?
I talked about how to get the trend direction here. There are many ways, but in this context we can use a simple 5-8 crossover. If that gives us our daily direction, why should we care about momentum?
Simple – when momentum and trend are aligned, that is where the profit is to be made. The trend pushes price along in the right direction, and momentum very quickly takes over because that is the line of least resistance. When momentum and trend are going in opposite directions, expect choppy price action. IN FACT, YOU CAN EXPECT NOVICE TRADERS TO LOSE MONEY IN THIS PHASE OF PRICE ACTION.
Wouldn’t it be useful to see in a trice how “dangerous” the market is to you on any given day?
So give me the secret already!
Here’s a really simple method for finding momentum. Place a simple RSI with default period 14 on a chart. Place the 60 and 40 levels on the RSI.
1. If RSI last closed above 60 in recent history and has not closed below 40, the momentum is up. This momentum continues to be up as long as RSI does not go below 40. (It does not have to remain ABOVE 60.)
2. If RSI last closed below 40 in recent history and has not closed above 60, the momentum is down. This momentum continues to be down as long as RSI does not go above 60. (It does not have to remain BELOW 40.)
Putting It All Together
So, if RSI last closed above 60 and the 5 SMA has crossed above the 8 SMA, then the trend and momentum are aligned to the upside. VERIFY THIS FOR YOURSELF: Put the RSI, 5 EMA and 8 EMA on a chart and look for periods like this. Count the number of days that are up versus the number of days that are down. You should find that the number of UP days are significantly more.
Similarly, if RSI last closed below 40 and the 5 SMA has crossed below the 8 SMA, then the trend and momentum are aligned to the downside. VERIFY THIS FOR YOURSELF: Put the RSI, 5 EMA and 8 EMA on a chart and look for periods like this. Count the number of days that are up versus the number of days that are down. You should find that the number of DOWN days are significantly more.
When any of the other possibilities occur, momentum and smaller trend are not aligned and thus you should expect more uncertainty. The number of up and down days are usually slightly skewed in favour of the trend (the 5-8 cross), but much less significantly so.
This valuable piece of information can provide the basis for many a trading system.
With best wishes for your trading,
Private Fund Trader/Head Trader Consultant
“We take your trading seriously. You should too. Make It Pay.”
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