High Probability Trading Using the Five Minute Momentum Strategy

Sep 11 • Forex Trading Strategies • 2171 Views • Comments Off on High Probability Trading Using the Five Minute Momentum Strategy

High probability trading strategies do not only involve long and medium-term trades but also short-term momentum trades that allow traders to capture quick gains in a series of trades. These kinds of trades are called momentum trades because the trader captures the momentum of a price movement in a certain direction and then jumps off when he senses that it is losing strength. Hence, to create an effective momentum strategy, it requires a clear exit signal while still being able to ride as much of the momentum as possible to capture profits.

An effective high probability trading momentum strategy is the five minute momentum trade, which looks for momentum bursts on charts using five-minute periods. The chart will use a 20 period exponential moving average and the Moving Average Convergence Divergence (MACD). The EMA, unlike the SMA, gives more weight to more recent price data in order to detect short-term trends. The MACD is used to gauge momentum. This strategy involves waiting for a reversal signal but not exiting the trade until it is supported by momentum enough to result in a larger extension burst. The trader’s position during the trade is exited in two parts, with the first locking in gains while the second attempts to capture profits from the remaining momentum. There is no risk in the second exit since the stop loss has already been moved to the breakeven point.

If you are conducting a five minute high probability trading strategy using a long position, wait until the price of the currency pair falls below the 20-period EMA and the MACD turns negative. When the price moves above the EMA and the MACD has crossed into positive or is moving from negative to positive no more than five bars ago, sell when the price hits 10 pips above the EMA.

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If you are planning to attempt a short trade, the opposite of the above should occur, i.e. the exchange rate of the currency pair should be trading above the EMA and the MACD is positive. Once the price moves below the 20 EMA, the MACD should be crossing from positive to negative or be already negative no more than five bars ago. Go short when the price hits ten pips below the EMA. Then, buy back half of the currency when the price reaches your entry point with less amount risked. Move the stop loss to breakeven point and then buy back the second half of your currency when the price reaches this point.

It should also be considered that this high probability trading strategy is not always effective if you end up trading in ranges that are too broad or too tight. And when you are trading at a time when there is little activity, the price may simply be fluctuating around the 20 EMA, resulting in the MACD giving many false trading signals. On the other hand, if the currency being traded using this strategy is trading within a range that is too wide, the stop loss might be reached before the profit target is triggered.

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