Momentum Trading – What is it and which are the best systems for it?

23 min read

Momentum trading is a frequently utilized trading strategy mainly used in Forex, CFD, and stock trading. Momentum trading meaning is a strategy based on the velocity of the price movements which determines to enter and exit the positions. The price movement that the strategy emphasizes is quite similar to the term that we encounter in physics. Momentum is a result of the multiplication of mass by velocity which describes how likely is the object to continue on the provided path. To apply this concept to Forex trading, regard the two variables used in the equation to be trading volume and price change rates. Hence, if the price movement in a specific direction is strong enough, it is expected to stay so until the trend begins to lose momentum.

There are numerous technical indicators that momentum traders use for measuring the trend and likelihood of the asset remaining in the same direction. For instance, the indicators measure the price change rate of a given currency pair or describe a probable retracement or reversal, suggest approximately how long the trend is expected to continue, etc. There are dozens of momentum trading indicators but not all of them are supported on systems available globally. Only a few systems are capable of offering proprietary indicators, manual trading options, and proper monitoring and support.

In this article, we will cover the absolute best systems for momentum trading including the fully automated and semi-automated options. We will recommend alternatives according to the trading capital available, the complexity of the systems, profitability rate, risk/reward ratio, monthly returns, and much more. Furthermore, we will provide the background information on each system along with its origins, a number of satisfied users, pricing, specifications, and other details that momentum traders might find crucial to know.

Momentum Strategies

There can be various customized strategies for momentum trading, however, the two main categories stand out – relative and absolute strategies. While absolute momentum trading strategy is much more frequent among Forex traders, relative strategy has also got a significant increase in followers recently. Relative momentum trading strategy means comparing the performance of specific currency pairs and making decisions based on it. Hence, traders would be buying the well-performing pairs and selling the poorer ones. On the other hand, absolute momentum trading strategy will measure the performance of a single pair and compare it against the past performance data – in historical time series.

The choice can also be made in accordance with the position length of trade. For instance, traders can choose between a short term momentum trading strategy and a long-term one. In this situation, traders will need to assess the strength of a trend to estimate how long it will hold. For instance, day traders and scalpers would be looking for momentum strategies for shorter time frames, while position traders will obviously seek long-term ones. While most of the time both short-term and long-term momentum traders will use the same technical indicators, there are certain specifications to each of them that are way more useful for one of these two strategies. We will cover the importance and usefulness of each common technical indicator in greater detail below.

Factors for Momentum Trading

Momentum indicators are regarded as essential components of momentum strategies. But how do you identify which ones you need to use most frequently based on your strategy, type of financial instrument, or even trading capital? Well, before we move on listing and explaining the indicators, let’s assess the factors defining momentum. Those are volume, volatility, and timeframe.

Volume measures the trading amount of the given currency pair within a certain time period. The volume factor is crucial because Forex traders need to open and close positions in an instant on the market. High volumes appear when the concentration of the buyers and sellers is high thus resulting in higher market volatility.

Volatility on the other hand is a degree to which the price of an asset changes or fluctuates in a given time frame. In momentum trading strategy Forex, it is important for day traders and scalpers to target highly volatile currency pairs and observe the assets that offer short-term significant price movements. However, we recommend that traders keep in mind risk management strategies to avoid massive losses in highly volatile markets.

The timeframe is another significant factor that in fact determines the strategy of the trader. For instance, the short-term strategy traders will still need to assess the strength of a certain trend and to forecast how long it will keep the same direction. If the trend is expected to intensify further then they might decide to enter the position later. On the other hand, long-term traders will get involved in position trading with appropriate strategies targeting days or weeks-long strategies and fairly stable assets.

Best Momentum Indicator Options

Technical indicators work closely with the factors that we explained above. Depending on your trading strategy you might differentiate across several indicators, however, there are some that are universal across all platforms no matter the strategy option. We will discuss the most popular indicators one by one providing insight into how they are utilized and what significance they carry for the Forex momentum traders.

  • Relative Strength Index (RSI) – you will encounter this index most frequently on the popular automated or manual trading platforms. It is one of the major price movement strength measures within a specific time period. It is used to quantify the relative strength of a current trend against the previous performance.
  • Moving Averages – it has several usages in different trading strategies, however, mainly is beneficial as it smoothes out erratic price movements that appear on the price charts in order to fully picture the overall trend of asset pricing. There are three types of moving averages that traders commonly implement – SMA (simple moving averages), EMA (exponential moving averages), and MACD (moving average convergence divergence).
    SMA is an arithmetic average of price movement which has a simple formula – summing up the recent prices and dividing the result by the time frame of the given calculation average. EMA differs from simple averages in a way that concentrates more on the importance of recent price figures. It is a type of weighted moving average. MACD, on the other hand, is an indicator used to reveal changes in strength, momentum, direction, as well as the asset price trend. Usually, MACD is used for trading with the most volatile and the best stocks for momentum trading.
  • Commodity Channel Index (CCI) – CCI uses a simple moving average (SMA) and mean deviation from the asset’s average price. It compares these two data against the usual price of a currency pair including its average, high, low, open, and close figures. The most frequent application of the indicator is identifying oversold and overbought positions. You can identify market conditions in the following way: overbought conditions will read above 100, whereas oversold conditions will be below 100.
  • On Balance Volume (OBV) – this indicator is not available on all trading platforms and mainly advanced traders are utilizing it as a technical indicator of momentum trading. The OBV uses volume changes to predict the price of an asset. Another use of the indicator in momentum trading algorithm is its analysis of the sentiment of the traders’ community which then produces predictions for a bullish or bearish outcome. Traders can use OBV to compare the relative action of OBV generated data against the price bars, which produce more actionable signals.
  • Stochastics – stochastics indicator works best with specified time frames. Within a period it compares the current market price of a currency pair against its price range. Using a stochastics indicator, traders can identify the upward and downward price momentums of any given currency pair, or stock. It serves as one of the simplest, yet useful Forex indicators across a great majority of the platforms. The indicator below 20 means the upward price momentum, whereas the above 80 indicator shows the downward price momentum.
  • Average Directional Index (ADX) – ADX is one of the underrated momentum trading indicators which is known to more advanced or upper-intermediate traders’ communities. It is a pure trend strength measuring indicator using positive (+DI) and negative (-DI) directional indicators along with the main indicator of the trendline. There are several main outcomes that the tool can display which are 25+ ADX, -20 ADX, or non-trending. If the indicator shows above 25, it means that there is a strong price trend. If it indicates below 20 then the trend is very weak or is absent at all. Non-trending usually means that price is going through extreme volatility without a clear direction present or is changing the trend.
  • Stochastic Momentum Index (SMI) – SMI is the more sophisticated and upgraded version of another common indicator – The stochastic Oscillator. SMI displays the comparative data of the distance from a current closing price of a stock, currency pair, or another asset relating to the median of either the high or low range of the price. This indicator is highly valued by professional traders since it offers fewer false swings and works equally well for both trendy and nearly trendless assets.

Choosing the Best Momentum Trading System

Whether you are a momentum day trader, scalper, or position trader you will need a reliable, well-tested, multifunctional, and rich trading system to make the most out of your investment. Few experienced traders will work on designing their own momentum systems but with a significant investment of time and often financial resources, as well. You would need to identify new Forex market trends but also be quick so that you do not miss the trend and enter when it is already fading out. You would also need to follow strict money management rules, as well as risk management principles to avoid major losses.

Since the majority of beginner or even intermediate traders will not likely risk designing their own momentum trading systems there are numerous ready templates produced by exceptional traders or financial institutions freely available online. We will be listing the very best momentum system templates for beginner, intermediate, advanced, and expert Forex traders with both fully automated and semi-automated solutions below.

CAMMACD – Award-winning price action

CAMMACD is a semi-automated momentum trading system generating reverse indicator-based alerts and optimizing entries on a 15 minutes chart. The system is based on the Black Widow method and is ideal for both intraday Forex trading and CFD trading on stocks or other financial instruments. The historical drawdown of the system reaches a maximum of 20% guaranteeing the simplicity of achieving win rates without compromising the stability.

CAMMACD is being actively used and promoted by the large trading communities such as Forex Factory, Investing.com, FXEmpire, and FXStreet with numerous other contributors, as well. CAMMAD comes with pre-defined MetaTrader 4 templates, with ATR levels and several technical indicators which we will discuss in greater detail below.

Here are the main details and achievements of the system:

  • Win rate: 75% (total of 476 wins)
  • Risk/reward ratio: 0.65 (2020 data)
  • Pips: +500 (monthly average)
  • Monthly returns: 15% (1% risk per trade)

Proprietary Indicators

CAMMACD offers indicators for every level of expertise in Forex trading ranging from simple to complex indicators including Reverse Indicator, ATR levels, and three other custom trend indicators.

The Reverse Indicator or the Momentum Reversal Indicator (MRI) as it is frequently called among the experts’ community of traders is a more sophisticated indicator used to tell the anticipated ending of a trend. Usually, it is best to get acquainted with the basic functions of MRI prior to using it for trend-ending projections. However, it is one of the best tools for deciding when to exit the market based on the momentum in price movement.

ATR levels are the MetaTrader 4-specific indicator utilized for transforming the accumulated historical data on specific currency pairs or financial assets. It works best for identifying numerous peculiarities and patterns within the price dynamics of an instrument that could otherwise be undetectable by the naked eye.

camarilla.PRO is a proprietary indicator of the CAMMACD system allowing identification of key levels on two-time frames instead of the one. It offers very precise support & resistance, trading with breaks or bounces and trading with a trend or with a reversal. camarilla.PRO is the best tool for understanding intra-day, intra-week, or intra-month space, but it is not a stand-alone tool and should be used with other indicators, as well.

Atr.PRO is the favorite indicator of the day traders as it displays projections of an upcoming day’s highs and lows. It will provide all major ATR levels and will calculate support and resistance levels each day before market opening. atr.PRO additionally displays price targets for its users for given intra-day trading. It proves to be one of the best tools for trading trends or counter-trend movements.

Macd.PRO is a specific momentum trading indicator that analyses the upside and downside impulses, retracements, and pullbacks. It is a proprietary version of the moving average convergence divergence (MACD) indicator that we covered above in the article. Apart from impulse analysis, ad trend retracements, macd.PRO also offers insights into divergence patterns.

Pricing

The Black Widow method is a premium and exclusive trading approach developed in full compliance with UK Forex Award winner Nenad’s principles (Nenad Kerkez aka. Tarantula), hence it is not surprising to observe the respective pricing of the product. The traders can purchase lifetime access to the Black Widow and CAMMACD momentum system for 1,299 euros. Furthermore, the plan comes with numerous benefits including free educational resources on SWAT handouts and books, ECS.PATS template and ECS.START handout bundle, and numerous other materials for the users.

If pricing is not convenient for the users, they can still purchase individual proprietary indicators of the provider: camilla.PRO for 129 euros, atr.PRO for 119 euros and macd.PRO for 29 euros.

CMC Markets – Next Generation

CMC Markets offers proprietary and award-winning platforms for spread betting and CFD trading with advanced charts and graphs that display clearly defined momentum for the traders’ positions. With various functions supported and inbuilt within the software, users can easily draw their own trendlines and customize the interface. For momentum traders, several price projection tools are available along with 12 different charting types. Furthermore, they can use more than 115 technical indicators and over 70 chart patterns for deep-dive analysis. We can summarize the performance and quality of the platform in few points below:

  • Regulated in the United Kingdom in compliance with FCA regulations
  • Fully GDPR-compliant, with all personal data encrypted.
  • Trailing and guaranteed stop losses, partial closure, market orders, and boundary orders
  • 120 of the most popular instruments scanned every 15 minutes for emerging and completed chart patterns, such as wedges, channels, and head & shoulders formations.
  • Sentiment identification for momentum trading – client sentiment tool shows where traders are bullish and where they’re bearish, based on real-time trades.
  • 99.9% fill rate
  • 99.95%+ platform stability
  • 100% automated execution

Platform features

There are numerous features supported on the Next Generation platform for momentum trading including pattern recognition scanner, module linking, client sentiment analysis, charting features, MetaTrader 4 indicators, etc. We will cover each individual feature in greater detail, but we will not discuss the ones that we’ve already explained in the article above, such as the MACD indicator and RSI.

A pattern recognition scanner along with a price projection box is one of the most useful momentum trading tools. It scans the popular assets every 15 minutes to identify the trending patterns such as wedges, channels, and head and shoulders formations. While the price projection feature uses technical-analysis techniques to predict where the price action of an instrument goes on the chart. The users can also utilize a backtesting tool inbuilt within the platform for accessing and measuring the historical performance of every single pattern and check the matching rate of the price with the projection box.

Module linking is not a necessary step to take for the traders, however, it is extremely useful for automatization of your strategic planning. It allows traders to group several modules together. So that whenever you update or modify a certain asset in one module, the rest of the linked modules will automatically change as per your original modifications. These modules could be linked to Reuters market news, client sentiment analysis, various charts, and order tickets which lets you react quickly to important releases in the market.

The client sentiment analysis feature is a complex analytical tool that calculates the percentage of clients purchasing a certain asset versus the percentage of clients selling it. You can grasp an idea of what clients’ expectations are in a given moment and at the same time observe the monetary value of those positions.

This feature also allows customization and filtering of what type of traders you would like to see. You can only observe the data from top or expert traders based on their performance and profitability rates over the last three months. The data is updated every minute providing nearly real-time client sentiment information, which could be used even during the most volatile periods of the market.

For the MT4 momentum trading system, CMC markets offer 12 add-ons and over 15 indicators including the Pivot Points, Renko Charts, Donchian channel, Keltner channel, Candle countdown, Bollinger Bands, SMAs, Ichimoku clouds, MACD, RSI, and Symbol info. The package of the charting features includes 12 different chart types, including the popular line, OHLC and candlestick charts, Kagi, line break, and Renko charts. All of them come with over 35 drawing tools to draw support and resistance levels, highlight key price moves and patterns, etc.

Pricing

One of the best things about using CMC platforms for momentum trading is the fact that there is no special cost for opening an account. You can register a live spread betting or CFD account free of charge but would have to fund your account before you start trading. The main cost that a trader has to pay for with CMC Markets is the spread, which starts from 0.7 pips on the most popular Forex currency pairs. However, as a momentum trader, you would also need a market data subscription which could cost 20 AUD, 120 HKD, or vary according to the country of your residence and the account base currency. The subscription fees are also subject to local taxes (20% VAT in the UK for example).

NinjaTrader 8 – Automated momentum trading

NinjaTrader is another award-winning technology that can be mostly found on the Forex.com platform with full package pricing, execution, and service. It is a fully automated solution with dominant charting and analysis functions. Users can easily attach their orders to various indicators for automated position execution without any need for further programming. They can set up predefined conditions for real-time Forex markets monitoring. Using the price and time data, PnL, and indicator value the lists of the data points can be customized in any way a trader wishes to.

Furthermore, there are multiple advanced trade management strategies supported and integrated directly into the NinjaTrader 8 platform. These strategies allow the automatic submission of stop loss and profit target orders with a seamless execution while at the same time managing the trade exits. The main features of the platform include:

  • Advanced charting package displaying bid and ask simultaneously
  • Pre-configured +100 indicators and chart styles
  • Numerous powerful drawing tools
  • Possibility to load multiple time-frames in a single chart
  • Possibility to load corresponding markets in a single chart
  • Automatic submission of stop loss and profit target orders
  • Near 0 latency in order submission/modification
  • Add multiple indicator columns for actionable information at a glance
  • EOD historical data for stocks, futures, and Forex
  • Thousands of 3rd party add-ons
  • Hundreds of educational videos

Trading Indicators

Even though NinjaTrader supports more than 14 momentum trading strategies with various benefits, automation possibilities, and tools, we will not go in-depth about each strategy. Instead, we will provide the information on the most useful technical indicators supported on NT 8 platform that could be applied and used with any chosen predefined strategy template. We cannot cover all 104 momentum indicators, therefore, we will focus on the most popular ones that are TurnSignal Indicators – by TurnSignal Inc, TrendEdge Volume – by Emergent Cybernetics, CIT Channels – by CIT Indicators, and Q-Indicator – by JohnQ Trading.

TurnSignal Indicators developed by TurnSignal Inc is one of the favorite momentum indicators which uses a complex algorithm to identify the point where the market direction is changing. It comes with an automatic audio alert notifying when the system detects a turn in the market turn. At the same time, the charting bars’ colors will change which will give a good indication of when a user should enter or exit the market.

TrendEdge Volume designed by Emergent Cybernetics uses a strategic combination of both price action and average volume lookback. It is often utilized to calculate the increasing buy or sell volumes. This indicator is considered to be the oscillating modified volume estimator which comes with a very simple application. Traders can simply look at the chart and identify according to the background color the state of the market participants – green color will indicate that buyers are in control, whereas red color will show that the sellers are in charge for a given timeframe.

CIT Channels developed by J.M Hurst and CIT Indicators provide a powerful insight into trend definition and identification of its range with surprising accuracy no matter the time frame be it an intra-day, intra-week, or intra-month. It also aids the users to define the risk profile on the upcoming trade. Even though the indicator’s default settings almost ideally apply to nearly any instrument at any given moment, users can still manually configure the distance between each channel through the settings dialog.

Q-Indicator offered by JohnQ Trading is one of the best momentum trading tools to identify the overbought and oversold conditions of the market with the aid of visual signals. The users can easily adjust the indicator’s operation to suit their own trading strategies and take advantage of different imbalances in the market. Similar to other indicators that we discussed above, Q-ProTraderIndicator uses colors to simplify the identification of the market’s condition. For instance, the red background shows a downward pricing trend of the market, whereas the green background tells about an upward pricing trend of the market.

Pricing

NinjaTrader 8 is freely available to download as a simulation from its official website. However, those who would like to access the complete functionality of the platform need to buy subscription plans. The monthly cost of the subscription is 149 US dollars. The yearly subscription plan costs 1,499 US dollars. However, traders will also need to purchase advanced technical indicators individually. The first indicator, TurnSignal, and CIT Channels are freely available, however, TrendEdge Volume costs 89 US dollars for a lifetime access license, while Q-ProTraderIndicator costs 25 US dollars.

Should you pay for momentum trading strategies?

It is a frequent question that Forex momentum traders have whether they should design their own manual momentum strategies or use the platforms and templates available online. Well, it depends on a lot of things. First of all, if you are a highly experienced trader with a deep understanding of market movements, trends, complex technical analysis specifications and with strong confidence, then sure, go ahead and try your manual strategy. But you would have to spend quite a long time backtesting your strategy which might even appear to be costly. The clear advantage that already existing strategies have is that they are well-tested and you can choose them according to profitability rate, pricing, or any other feature you like.

Furthermore, you would still have to buy a lot of technical indicators such as client sentiment analysis tools, and several price projection indicators to successfully conduct your trades. Therefore, we believe that in most cases it would be much more time-efficient and energy-efficient to purchase the already existing systems and manually make modifications within them if necessary. We would strongly recommend choosing between the three proprietary systems that we covered in our article – CAMMACD, CMC Markets – Next Generation, and NinjaTrader 8.

FAQs

How do you master momentum in trading?

There are numerous guides and handouts that you can read on momentum trading. First of all, after you grasp the main concept of momentum and its significance in trading you should get acquainted with basic short-term, long-term, volume-based, volatility-based, and time-frame-based momentum trading strategies. You should also set realistic trading goals that you would like to reach and choose your strategy in accordance with it. Afterward, get familiar with numerous technical indicators that are frequently used for momentum trading such as Relative Strength Index (RSI), moving averages, and Commodity Channel Index (CCI).

How do you trade stock momentum?

Stock momentum trading is not much different from momentum trading in Forex. Instead of currency pairs, you simply trade stocks or stock CFDs with similar technical indicators, trading tools, but maybe on a different platform, such as MetaTrader 5 or the proprietary platform. Stock momentum trading might be more complex since there are much more instruments available to trade than in the Forex industry. Furthermore, it is not as volatile as the currency market, hence, there are limited stock momentum traders who get involved in intra-day trading. The most frequent time frame is intra-week or intra-month stock momentum trading.

Do momentum strategies work?

Yes, momentum strategies do work. But it depends on the market that you choose for trading. The momentum trading strategies are most frequently applied to options, Forex, stocks, and CFD trading. While every trader can design his or her custom trading strategy, most traders will purchase already existing strategy templates that were designed by a group of experienced traders or institutions.

These strategies represent in advance configurations of numerous technical indicators, charting mechanisms, and tools used to identify momentum, trend, and client sentiment in specific markets. However, not all momentum strategies are equally good. You would have to check the profitability rate, backtesting information, and the recognition or active users of the system or strategy before you initially commit to it.

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