Momentum is a controversial profitable trading method. Many traders have made big profits from this method. However, it is also one of the most losing methods if not mastered. Let’s explore what Momentum trading is and learn effective trading strategies with Crypto Trading through the following article!
Momentum: The Magic Trading Indicator for Traders
The Momentum indicator is trusted and widely used by many investors in technical analysis. Momentum (MOM) helps identify trend reversal points. To provide information about market momentum
What is Momentum? What indicators does it include?
Momentum is an important indicator in technical analysis. The volatility of Momentum during the day reflects the price changes of Crypto in the market. Based on this indicator, investors can evaluate the overview of the Crypto market in recent times.
The Momentum indicator is also closely related to market trends. Investors use it to infer the volatility of Crypto. It predicts two main trends: continuation or reversal. The probability of the product price remaining unchanged is very low.
To make more accurate trading decisions, investors can combine Momentum with the MA average. This is a tool that represents the average price of Crypto over a certain period. At the same time, RSI also plays an important role, helping to measure the volatility of Crypto prices. It provides the necessary information for investors to make informed decisions.
Characteristics and Role of Momentum Indicators in Crypto
Indicators in Crypto analysis all have their own characteristics. To avoid unfortunate mistakes in the process of Crypto trading, we need to not only understand Momentum but also understand its characteristics.
Momentum can be used at any point in time or period. On Crypto charts, the 100 line represents the average of Momentum. When Momentum goes beyond the 100 lines in an upward direction. It shows that the price of the product is moving strongly. This is to create opportunities for investors to earn large profits.
Conversely, if Momentum is below 100, the price of the product is in a downtrend. For example, if Momentum is at 86%, the price of the product is falling more than 85%. In this situation, investors should be cautious. At the same time, they need to make wise decisions to avoid capital losses. Many investors may choose to sell the product to preserve the remaining capital.
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The formula used to calculate the Momentum indicator
Investors can use a momentum indicator to determine the strength of a price trend on a trading chart. This indicator compares the closing price of a current trading session with the closing price of the previous trading session.
The formula for calculating Momentum is as follows: MOM = (CA/CP)*100
In there:
- CA: Closing price of a current Crypto trading session
- CP: Closing price of a number of previous trading sessions (N sessions)
Momentum helps investors evaluate price changes. At the same time, it can effectively determine market trends.
How to Determine Momentum in Crypto Investing
Currently, there are two main Momentum indicator levels :
- MOM indicator > 100: Current price is higher than the price of the previous trading session “n”.
- MOM indicator < 100: Current price is lower than the price of the previous trading session “n”.
When Momentum is above and away from the 100 axes, the price is rising faster. Conversely, when Momentum is below and away from the 100 axis, the price is falling faster.
Comparing Momentum indicators, MOM at 102 usually indicates a stronger bullish trend than MOM at 101. Similarly, MOM at 98 indicates a stronger bearish trend than MOM at 99.
Thanks to the development of modern technology, reading and understanding Momentum has become much simpler and more accurate. Trading platforms now provide automatic MOM calculation tools. This helps investors save time and minimize errors.
Instructions for installing Momentum on Tradingview
Step 1: Go to TradingView and select the cryptocurrency pair you want to trade.
Step 2: Click on “Indicators” to open the list of indicators.
Step 3: In the search box, type “Momentum” to select the MOM indicator.
What are the benefits and limitations of using Momentum?
Momentum brings extremely valuable benefits to traders. However, this method cannot avoid risks. Here are the benefits and limitations when using MOM :
Outstanding benefits of Momentum indicator
- High Profits in Short Time: MOM trading has the potential to be very profitable. Momentum traders can capture short-term price movements. It is unlike long-term investors who have to wait for a significant price increase to make a profit.
- Take advantage of crypto market volatility. One of the defining characteristics of the crypto market is its high volatility. This volatility creates both risk and profit opportunities. For traders who are not afraid of the risks of crypto, MOM trading offers the opportunity to take advantage of this volatility to make a profit.
- Helps traders control emotions. Momentum trading is based entirely on technical analysis. It requires traders to put aside their emotions and follow the charts. MOM traders determine buy and sell points based on technical indicators. This helps them avoid making trading decisions based on emotions. This is especially useful when many other traders. Especially inexperienced traders. They often react emotionally to market fluctuations.
See more: OKX: open an OKX account – Reputable crypto exchange
Disadvantages of Momentum Trading
- High fees can affect the profitability of Crypto trading. Momentum can fade as quickly as it started, affecting the asset’s value. Furthermore, MOM trading requires traders to buy and sell frequently. This high frequency of trading will inevitably result in traders paying more transaction fees. This in turn affects profitability.
- Trend Reversals: While there are technical indicators to guide Momentum traders, nothing in Crypto trading is certain. Just because a coin has performed well in the past does not guarantee that it will continue to do so in the future. Trend reversals can happen unexpectedly.
- Time-sensitive and time-consuming. MOM trading success depends on entering and exiting the market at the right time. Because of this time-sensitive nature, Momentum trading is also time-consuming. MOM traders have to sit in front of their computers and monitor the market for hours or days. They do not have the “comfort” of long-term investors who do not need to monitor the market constantly.
- Market Sensitivity: Momentum trading is not applicable in all market situations. It is usually profitable in bullish markets. Meanwhile, traders may incur losses if they use MOM trading in bearish markets or bull traps.
Revealing 3 principles of optimal trading with Momentum
Using Momentum in technical analysis is quite simple. However, if you do not know how to apply it correctly, you can make wrong judgments. The following article will guide you in detail on the principles of using MOM effectively:
Crypto Trading when there is a phenomenon of breaking resistance when Sideway
Breaking above resistance after a sideways move is a sign of a strong recovery from the buying side. This usually shows that the momentum is starting to increase.
- First, you need to identify a sideways period that has lasted for several days. Sideways means that there is no break between the buying and selling forces. Both are considering buying and selling at resistance and support levels.
- Next, you need to keep an eye on the volume. Any sudden changes in volume should be watched more carefully (or use a bot to help). If there is a spike in volume but no change in support level, you should continue to wait.
- Place a Stop Buy order when the conditions are met. First, the volume increases, second, the price successfully breaks through the resistance. In this case, after a large volume of green candles appears, the next green candle breaks through the resistance and triggers a Buy/Stop order at $65.
- Quick action is important, take profit when the price doubles the sideway range. For example, according to Fibonacci 1 indicator.
As you can see from the example above, the trader only made $5 per LTC. However, it showed quickness and discipline in realizing that the “momentum” had started.
Breakout from price pattern
It should be noted that not all price patterns are suitable for Momentum trading. Preference should be given to patterns that technical analysis theory can easily predict the upcoming trend. For example, bullish patterns, bearish patterns, ascending triangles, and descending triangles rather than neutral patterns (such as symmetrical triangles).
- Determine what the price model is and how its theory predicts the upcoming trend. Based on that, choose the direction of the trade according to the model’s prediction.
- Observe at the end of the pattern. Does the volume increase compared to the average of the previous candles?
- If so, more careful monitoring is needed to decide whether to use a Stop Sell order. For example, in the case of a descending triangle, a stop-sell order is triggered when the price breaks the descending triangle support. The loss is cut when the product price returns inside the descending triangle.
- Act quickly to take profit based on the price range of that price pattern. If the price pattern has multiple profit targets, choose the closest target. For example, in this case, the target is double the height of the triangle, which is the Fibonacci level 1.
As you can see in the example above, if you don’t act quickly and keep your hopes too high, you may not be able to close your profits in time and sometimes your profits will turn into losses.
Use technical analysis when there is confirmation of Momentum
In some cases, you can predict the beginning of a bullish/bearish Momentum early by recognizing the return of buying/selling pressure without having to wait for a breakout. This often happens when you use momentum indicators such as RSI, MACD-H, Stochastic, ADX, and Ichimoku for support.
- Understand the technical indicator you are using. It is used to measure the strength of the trend over a specific time. This example uses RSI, a popular indicator.
- Wait for technical signals from indicators that indicate the presence or impending presence of bullish/bearish MOM. Along with confirmation from trading volume. In this example, a bottom divergence signal from RSI predicts bullishness. It is seen on a hammer candle with a long wick accompanied by a surge in trading volume over several days. Therefore, there is a clear sign of bullish MOM.
- Quickly open a position when the candle confirms the signal. In this case, the entry point is within the price range of the hammer candle. At the same time, place a stop loss when the price makes a new low (indicating that the defeat of buying pressure has just begun).
- Place stop limit orders early to protect capital and take profits when RSI on the same timeframe hits 70, indicating overbought.
How to apply risk management principles when trading Momentum Trading
Risk management is an integral part of Momentum trading. This is to ensure that you do not incur huge losses or suffer financial harm. Here are some important risk management principles when applying MOM trading :
- Determine your risk: Before opening a position, determine how much risk you are willing to accept. Typically, your daily risk should not exceed one or two percent of your total invested capital.
- Place a Stop-Loss Order: Place a stop-loss order to automatically close a position if the price moves against you. This helps traders limit losses and protect their investment capital.
- Use Take Profit Orders: Set a take profit order to automatically sell when the price reaches the target profit level. Helps lock in profits and avoid holding a trade for too long and incurring losses.
- Monitor market movements: Always keep an eye on the market situation and changes in trends. Adjust your strategy as needed to avoid unwanted risks.
- Practice the “Buy Low, Sell High” principle: Avoid buying assets when prices are at their peak. Instead, wait for prices to show signs of upward momentum before making a trade.
- Don’t go all-in: Set aside some capital to deal with unexpected situations. Make sure your personal finances aren’t severely affected.
Learn the factors to consider when trading with Momentum Indicators
When trading with MOM Indicators, there are a few important factors you need to keep in mind:
- Buy and Sell Signals: Momentum often generates buy and sell signals. You need to understand how to read and identify these signals. The purpose is to know when to buy and when to sell.
- Confirmation method: Confirming buy and sell signals is an important part of trading with MOM. You can use other indicators or confirmation from the price chart to ensure the accuracy of the signal.
- Trading Volume: Trading volume often accompanies Momentum signals. A buy or sell signal is stronger if it is confirmed by a large trading volume.
- Time: Observe the movement of MOM in different time frames. To provide information about short-term and long-term trends of the market.
- Correlation with price: Usually, the change in MOM will correspond to the movement of price. However, there can also be reversal signals or mismatches between the indicator and price.
- Parameter Tuning and Optimization: Some Momentums have adjustable parameters. Optimizing these parameters can help improve MOM performance in forecasting market trends.
Conclude
The article has provided an overview of Momentum and how to apply the Momentum indicator in trading. Crypto Trading hopes that this information will help traders add golden signals to their trading decisions and effectively apply them to their personal trading strategies. Don’t forget to follow our website for more useful news updates!
Frequently Asked Questions
How to measure Momentum?
Momentum is typically measured by the change in price over a specific period. A common way to measure MOM is to use technical indicators. Examples include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), or the Stochastic Oscillator.
Which indicator is used to measure Momentum?
Popular indicators used to measure Momentum include RSI, MACD, Stochastic Oscillator, and Rate of Change (ROC).
Why is Momentum Important in Crypto Trading?
Momentum can provide powerful buy and sell signals and help traders identify potential trading opportunities. It can help shape trends and predict market developments.
