Those of you looking for another form of Candlestick Trading have come to the right place. Here i will go over an easy to use strategy that simply involves looking for momentum in the market to get into a trade and then going for the next resistance or support area for taking profit or adjusting your stop loss.
Before we begin on this strategy we need to assess what i mean exactly by the term momentum, this is not an indicator. This is simply a way of assessing the candles and in this case it generally is referring to engulfing candles. So in another sense this is another form of price action trading. Now back to my point. To see momentum it means that one side of the market is winning, this could be the bearish side or this could be the bullish side.
In each sense we could also in another way see the charts like a battle field. And what happens on a battle field? One side wins for a while, then later another side takes over and starts winning. This not not much different in trading. Sometimes the bears have the charts and sometimes the bulls have the charts in there favor. So when we see the right combo of bears or bulls winning in certain places on the chart we know to enter that fact to ride the market in that direction of that winning.
Thus gaining what? Lots and lots of pips.
Momentum Strategy Rules
For a bullish situation you are looking for a big bullish engulfing candle close to or above a major support area. For a bearish situation you are looking for a big engulfing candle below or close to a major resistance line. After this candle you will wish to enter a buy or sell order a few pips further in the direction of where the engulfing candle is saying to go. That way your trade only enters if the trade keeps going in the direction of where the candles is suggesting.
For the stop loss you should place the stop in one of two places as a choice. The most protective place being just before the signal entering candle open or a little further to below the support or resistance. Which ever way is your choice. However you will find more trades will be stopped out if the stop is more conservative so putting below the support or above the resistance if close is recommended. However if the risk reward does not add up well then placing before the signal candle is a good conservative practice.
As for taking profit, we should always aim for the next resistance or support or for even better results we should use this first away to adjust our stop into the profit zone and then wait and see if the market will progress further and thus allowing us to get more pips. As an example is the target is 100 pips, when we get there we could lock in 50 pips and wait and see how the market reacts at that level. If it fights and progresses on it allows us to make more and more money and we can just keep adjusting our stop further and further into the profit area until we feel we have far enough.
Any time frame is fine as long as you abide by the engulfing momentum properties of the candle and support and resistance areas.
Above is an example of a Bullish momentum candle on the Eur/Usd just above the support. To fall into the category of a momentum based candle all it has to do is engulf many previous candles. This shows the shift in the power at that level. Also as it is close to support it gives it even more weight.
Above is an example of a Bearish momentum candle on the Eur/Usd that is breaking clearly through support. As it is very big it makes it even more so a momentum candle and increases the chance the market will continue in this direction of down at least all the way to the next support as can be seen. Also because it is breaking through resistance it is even better. As you can see by this candle the market shifted its weight immensely to to bearish side.
Please Note – Lastly before i leave you with this effective trading strategy i wanted to express it is important to see the difference between a engulfing candle and a momentum engulfing candle. In order for a engulfing candle to be called a engulfing candle all it has to do id engulf the last candle. For a momentum engulfing candle i like to see it engulf many previous candles. The more the better the signal.