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125# 5 min Momo Trade Trading System

 

Submit by Joker (Written by  Kathy Lien and Boris Schlossberg)

 

What's a Momo?

The Five Minute Momo Trade looks for a momentum or "momo" burst on very shortterm

(five-minute) charts. First, traders lay on two indicators, the first of which is the

20-period exponential moving average (EMA). The EMA is chosen over the simple

moving average because it places higher weight on recent movements, which is needed

for fast momentum trades. The moving average is used to help determine the trend. The second indicator to use is the moving average convergence divergence (MACD)

histogram, which helps us gauge momentum. The settings for the MACD histogram is

the default, which is first EMA = 12, second EMA = 26, signal EMA = 9, all using the

close price.

This strategy waits for a reversal trade but only takes advantage of it when momentum

supports the reversal move enough to create a larger extension burst. The position is

exited in two separate segments; the first half helps us lock in gains and ensures that we

never turn a winner into a loser. The second half lets us attempt to catch what could

become a very large move with no risk because the stop has already been moved to

breakeven.

Rules for a Long Trade

1. Look for currency pair trading below the 20-period EMA and MACD to be

negative.

 

2. Wait for price to cross above the 20-period EMA, then make sure that MACD is

either in the process of crossing from negative to positive or has crossed into

positive territory no longer than five bars ago.

3. Go long 10 pips above the 20-period EMA.

4. For an aggressive trade, place a stop at the swing low on the five-minute chart. For

a conservative trade, place a stop 20 pips below the 20-period EMA.

3. Go short 10 pips below the 20-period EMA.

4. For an aggressive trade, place stop at the swing high on a five-minute chart. For a

conservative trade, place the stop 20 pips above 20-period EMA

5. Buy back half of the position at entry minus the amount risked and move the stop

on the second half to breakeven.

6. Trail stop by lower of breakeven or 20-period EMA plus 15 pips

 

5. Sell half of the position at entry plus the amount risked; move the stop on the

second half to breakeven.

6. Trail the stop by breakeven or the 20-period EMA minus 15 pips, whichever is

higher.

Rules for a Short Trade

1. Look for the currency pair to be trading above the 20-period EMA and MACD

to be positive.

2. Wait for the price to cross below the 20-period EMA; make sure that MACD is

either in the process of crossing from positive to negative or crossed into negative

territory no longer than five bars ago.

 

Our first example in Figure 1 is the EUR/USD on March 16, 2006, when we see the

price move above the 20-period EMA as the MACD histogram crosses above the zero

line. Although there were a few instances of the price attempting to move above the 20-

period EMA between 1:30 and 2:00 EST, a trade was not triggered at that time because

the MACD histogram was below the zero line.

We waited for the MACD histogram to cross the zero line and when it did, the trade

was triggered at 1.2044. We enter at 1.2046 + 10 pips = 1.2056 with a stop at 1.2046 -

20 pips = 1.2026. Our first target was 1.2056 + 30 pips = 1.2084. It was triggered

approximately two and a half hours later. We exit half of the position and trail the

remaining half by the 20-period EMA minus 15 pips. The second half is eventually

closed at 1.2157 at 21:35 EST for a total profit on the trade of 65.5 pips.

Our first example in Figure 1 is the EUR/USD on March 16, 2006, when we see the

price move above the 20-period EMA as the MACD histogram crosses above the zero

line. Although there were a few instances of the price attempting to move above the 20-

period EMA between 1:30 and 2:00 EST, a trade was not triggered at that time because

the MACD histogram was below the zero line.

We waited for the MACD histogram to cross the zero line and when it did, the trade

was triggered at 1.2044. We enter at 1.2046 + 10 pips = 1.2056 with a stop at 1.2046 -

20 pips = 1.2026. Our first target was 1.2056 + 30 pips = 1.2084. It was triggered

approximately two and a half hours later. We exit half of the position and trail the

remaining half by the 20-period EMA minus 15 pips. The second half is eventually

closed at 1.2157 at 21:35 EST for a total profit on the trade of 65.5 pips.

in Figure 1 is the EUR/USD on March 16, 2006

Figure 1
Figure 1

 

 

Figure 2
Figure 2

The next example, shown in Figure 2, is USD/JPY on March 21, 2006, when we see the

price move above the 20-period EMA. Like in the previous EUR/USD example, there

were also a few instances in which the price crossed above the 20-period EMA right

before our entry point, but we did not take the trade because the MACD histogram was

below the zero line.

The MACD turned first, so we waited for the price to cross the EMA by 10 pips and

when it did, we entered the trade at 116.67 (EMA was at 116.57).

The math is a bit more complicated on this one. The stop is at the 20-EMA minus 20

pips or 116.57 - 20 pips = 116.37. The first target is entry plus the amount risked, or

116.67 + (116.67-116.37) = 116.97. It gets triggered five minutes later. We exit half of

the position and trail the remaining half by the 20-period EMA minus 15 pips. The

second half is eventually closed at 117.07 at 18:00 EST for a total average profit on the

trade of 35 pips. Although the profit was not as attractive as the first trade, the chart

shows a clean and smooth move that indicates that price action conformed well to our

rules.

 

 

Short Trades

 

Figure 3
Figure 3

 

On the short side, our first example is the NZD/USD on March 20, 2006 (Figure 3).

We see the price cross below the 20-period EMA, but the MACD histogram is still

positive, so we wait for it to cross below the zero line 25 minutes later. Our trade is then

triggered at 0.6294. Like the earlier USD/JPY example, the math is a bit messy on this

one because the cross of the moving average did not occur at the same time as when

MACD moved below the zero line like it did in our first EUR/USD example. As a

result, we enter at 0.6294.

Our stop is the 20-EMA plus 20 pips. At the time, the 20-EMA was at 0.6301, so that

puts our entry at 0.6291 and our stop at 0.6301 + 20pips = 0.6321. Our first target is the

entry price minus the amount risked or 0.6291 - (0.6321-0.6291) = 0.6261. The target is

hit two hours later and the stop on the second half is moved to breakeven. We then

proceed to trail the second half of the position by the 20-period EMA plus 15 pips. The

second half is then closed at 0.6262 at 7:10 EST for a total profit on the trade of 29.5

pips.

 

 

Figure 4
Figure 4

The example in Figure 4 is based on an opportunity that developed on March 10, 2006,

in the GBP/USD. In the chart below, the price crosses below the 20-period EMA and

we wait for 10 minutes for the MACD histogram to move into negative territory,

thereby triggering our entry order at 1.7375. Based on the rules above, as soon as the

trade is triggered, we put our stop at the 20-EMA plus 20 pips or 1.7385 + 20 = 1.7405.

Our first target is the entry price minus the amount risked, or 1.7375 - (1.7405 -

1.7375) = 1.7345. It gets triggered shortly thereafter. We then proceed to trail the second

half of the position by the 20-period EMA plus 15 pips. The second half of the position

is eventually closed at 1.7268 at 14:35 EST for a total profit on the trade of 68.5 pips.

Coincidently enough, the trade was also closed at the exact moment when the MACD

histogram flipped into positive territory.

 

Momo Trade Failure

 

Figure 5
Figure 5

As you can see, the Five Minute Momo Trade is an extremely powerful strategy to

capture momentum-based reversal moves. However, it does not always work and it is

important to explore an example of where it fails and to understand why this happenThe final example of the Five Minute Momo Trade is EUR/CHF on March 21, 2006.

In Figure 5, the price crosses below the 20-period EMA and we wait for 20 minutes for

the MACD histogram to move into negative territory, putting our entry order at 1.5711.

We place our stop at the 20-EMA plus 20 pips or 1.5721 + 20 = 1.5741. Our first targetis the entry price minus the amount risked or 1.5711 - (1.5741-1.5711) = 1.5681. The

price trades down to a low of 1.5696, which is not low enough to reach our trigger. It

then proceeds to reverse course, eventually hitting our stop, causing a total trade loss of

30 pips.

When trading the Five Minute Momo strategy the most important thing to be wary of

is trading ranges that are too tight or too wide. In quiet trading hours where the price

simply fluctuates around the 20-EMA, the MACD histogram may flip back and forth

causing many false signals. Alternatively, if this strategy is implemented in a currency

paid with a trading range that is too wide, the stop might be hit before the target is

triggered.

 

 

 Conclusion

The Five-Minute Momo Trade allows traders to profit on short bursts of momentum,

while also providing the solid exit rules required to protect profits.

 

 

 Conclusion

The Five-Minute Momo Trade allows traders to profit on short bursts of momentum,

while also providing the solid exit rules required to protect profits.

 

 

 

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Comments: 1
  • #1

    Denis (Thursday, 14 November 2013 23:49)

    Simple and clean! I like it! Thank you for sharing!

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