Momentum trading is a highly controversial investment method. However, this method also has a high risk of loss if not understood clearly. So, let’s learn about Momentum Trading with Crypto Trading!
What is Momentum Trading?
Momentum Trading is a trading strategy that takes advantage of the upward or downward momentum of an asset’s price. The basis of this strategy is that the price of a stock or asset tends to continue moving. They move in the same direction over some time.
Definition of Momentum Trading
Momentum Trading is an investment strategy that focuses on identifying an uptrend or downtrend. They initiate and exploit that trend to make short-term profits.
Momentum, in physics, means “inertia”. It means the momentum of a movement that has already begun. Applied to the financial markets, Momentum refers to the “up/down momentum” of prices. Traders will identify momentum and quickly take advantage of the opportunity to enter orders and take profits.
So, most Momentum Trading is usually based on the principle of “buy high and sell higher” or “sell low and buy back lower”. This strategy seems to contradict the popular advice of “don’t get caught up in FOMO” that many traders often follow.
How is Momentum Technical Analysis Different from FOMO?
Technical analysis Momentum indicators and FOMO both involve taking advantage of market trends. However, they differ in their approach and trading psychology.
For Momentum Trading:
- Scientific basis: Momentum Trading is based on technical tools indicators and price patterns. The main purpose is to determine the trend and the strength of that trend.
- Planned Strategy: Traders have a specific plan for entry/exit points, based on market data analysis. They use risk management strategies such as stop-loss orders to protect capital.
- Discipline and emotional control: Momentum traders maintain discipline in following their strategy. Every decision is not influenced by emotions.
- Analysis and reaction: Trading decisions are made based on data analysis and current market trends. They are not emotional reactions.
For FOMO:
- Lack of specific planning: FOMO-based trading often has no specific plan for entry and exit points. This can easily lead to buying when the price is too high and selling when the price is low. In other words, the investor will suffer a significant loss.
- Emotions rule: Traders are ruled by emotions. They easily get carried away with the crowd without proper risk control.
- Snap reaction: Trading decisions are often made quickly and without careful consideration. They are based on fear and unrealistic expectations.
See more: Learn Momentum – The 3 principles of optimal trading
What are Momentum Indicators in Crypto?
It can be said that the strong fluctuations in the Crypto market have created great opportunities. However, they also contain great risks for the Momentum Trading strategy. In this context, Momentum Trading clearly illustrates the philosophy of “high risk, high profit”:
- Bitcoin and Altcoins tend to have wider ranges than other assets. Low Cap Altcoins and new Altcoins tend to have significant price swings in their ups and downs. These swings can last for days. This makes Momentum Trading a weekly trade at times. Let’s look at the OP and ETHW charts for this year to get a better idea.
- Traders who lack discipline are more likely to “go with the flow”. Sometimes, they can fall victim to the “Pump & Dump” phenomenon that is common in the market. Discipline includes not defining stop loss points and not having a capital management strategy. In addition, refer to the CCI indicator (Commodity Channel Index) which helps traders identify overbought or oversold points. It can also be used to measure the strength of the Momentum price trend.
What factors should an effective Momentum Crypto Trading strategy be based on?
There is confusion in terminology that makes some Traders think that Momentum Trading only involves using momentum indicators. You can apply any technical analysis tool. As long as it helps you detect up/down trends early and seize opportunities in time.
For that purpose, there are some essential elements to optimize the Momentum Trading strategy :
- Volume is an important factor in identifying opportunities in Momentum Trading. In this strategy, paying attention to volume is indispensable. Because most momentum trades take place in a short period. The volatility of volume helps to reinforce technical signals. Even if there is a good technical signal, if there is no support from volume. It is still not enough to confirm a strong “momentum” trend to exploit.
- In trading, quick and decisive action is important. Once the bullish/bearish momentum has started, it can last for quite a long time. However, predicting the specific time is difficult. This is the golden opportunity for the Momentum Trading strategy to be effective. Therefore, quick action helps to minimize risks.
- Technical tools play an important role in finding a trading edge. Momentum Trading focuses on technical tools that support quick action at the current moment.
Technical Analysis Momentum Trading Gains Efficiency in Crypto
The following Momentum Trading strategies are proposed based on the combination of factors. The main purpose is to generate the best profits for Crypto Trading investors.
Observing the Resistance Breakout Phenomenon in Crypto Trading After Sideway with Large Volume
When the resistance level is broken after a Sideways period, it is a clear sign of a sudden return of buying pressure. This sudden increase shows that Momentum indicators are starting to accumulate.
- Step 1: Identify a Sideways phase that lasts for several days. Sideways refers to the lack of significant movement between buying and selling forces. Both are relatively balanced at a certain resistance and support.
- Step 2: Monitor the volume continuously. When there is any sudden change in trading volume. You need to continue to monitor the market more carefully (or use bots to support it). The moment the selling volume suddenly does not break the support level. At that time, you should continue to wait and observe more.
- Step 3: Place a Stop Buy order (buy immediately when there is an opportunity) when two conditions are met. First, the trading volume suddenly increases. Second, the price successfully breaks through the resistance level.
- Step 4: Take advantage of the opportunity and take profit when the price reaches double the amplitude of Sideway. For example, fibo 1. Need discipline in cutting loss quickly if the price returns to within the Sideway amplitude range. The remaining profit targets should not be too ambitious, Therefore, you should set a stop limit and wait.
Observe Momentum Indicators of the Breakout phenomenon from the price pattern with high volume
While there are many different methods for trading based on price patterns, Momentum Trading specifically focuses on the completion of a price pattern. It does this by a breakout that is confirmed by high volume.
- Step 1: Identify the current price model. At the same time, pay attention to the theory of this model to predict where the next trend will go. Based on the model’s prediction, you can choose the appropriate trading direction.
- Step 2: Watch for volume as you approach the end of the pattern. Notice if it increases relative to the average of the previous candles.
- Step 3: Continue to monitor carefully to see if a Stop Sell order can be triggered. For example, a Stop Sell order is triggered when the price breaks the support level of a descending triangle pattern. It is also necessary to stop losses when the price returns inside the descending triangle pattern.
- Step 4: Make a quick decision to close the profit based on the price measurement of the current price model. If the price model has many different Target levels, prioritize choosing the closest Target.
If you keep your expectations too high and are not quick enough, you may not be able to close your profits in time and may even lose money. Therefore, “acting quickly is a vital factor in Momentum Trading,” and “always being ready for the possibility of a ‘reversal’ happening soon” is extremely important.
See more: Instructions for opening an OKX exchange account
Observe technical signals confirmed by trading volume Crypto Trading
In some cases, you can predict an up/down momentum early. In case you observe the return of buying/selling pressure without waiting for a Breakout. This often happens when you use Momentum Trading indicators such as RSI, MACD-H, Stochastic, and ADX.
- Step 1: Understand and master the technical indicator you are applying. The main goal is to assess the strength of the trend over a certain period. This example uses a popular indicator like RSI Crypto Trading (Relative Strength Index).
- Step 2: Wait for technical signals from indicators that indicate an uptrend/downtrend has begun or is about to begin. Especially with confirmation from trading volume.
- Step 3: Quickly take advantage of the confirmation signal from the candle. In this situation, the entry point is within the price range of the Hammer candle. The stop loss is determined when the price forms a new bottom, indicating the surrender of buying pressure.
- Step 4: Place a stop limit order immediately to protect capital. At the same time, take profit when the RSI index on the same time frame touches the 70 zone.
In all strategies, confirmation by volume is always appreciated. Even if there is a good signal, but if the trading volume is weak, it is difficult to succeed.
Epilogue
Once you understand the nature of Momentum Trading, you don’t have to be tied to any of the 3 strategies. The important thing is that any plan that helps you identify the right “momentum” or that Momentum has started early can be considered a successful strategy. If you have any questions, let the Crypto Trading team answer them for you!
Frequently Asked Questions about Momentum Trading
What are the benefits and risks of Momentum Trading?
The benefits of Momentum Trading include the ability to make quick profits in a short period when the trader catches a strong bullish/bearish momentum. However, the risks are also high as the market can change rapidly, leading to large losses without a strict risk management strategy.
What strategies are commonly applied in Momentum Trading?
Strategies include Breakout Crypto Trading. There is also “pullback Trading”.
How to Succeed in Momentum Trading?
To be successful, traders need good technical analysis skills and the ability to accurately assess short-term market trends. They also need to set clear risk management rules, such as setting stop losses and taking profits to protect capital and earn profits.
