macdulio3

Momentum Raping #1

A lot of people declare themselves as momentum traders.

Since I am not everyone else, I can only give you my ideas on what Momentum Trading should mean.

Yes, when the rate of price change (trajectory) of price changes declines, that shows tiredness and your odds improve for a mean reversion.

I want to go into the nitty gritty however.

How does price turn around at all?

Strength has to transpire. This is one of the 3 corner stones.

As a momentum trader your friends should be oscillators and moving averages. Divergences too with the caveat that they area a pressure relief called upon by excessive strength.

This is the first lesson here. You should not be looking at divergences as a reversal indicator. The most common waves are corrective and they end in optimal strength prompting no reversal divergences.

Divergences are not the typical ending of a wave. They are showing “momentum slowing” until the scale is tipped.
The stochastic did not make it back to the overbought, yet price still turned back down?

See, the reversal off a reversal divergence is a weak one. An encounter with the 1-standard deviation of the 20 SMA of the 44 daily EMA may re-instate the trend in a jiffy. Lesson number 2.

It pays out to keep track of the presence of professional volume blocks in momentum trading.
Lesson number 3 is that strength has to walk a fine line to stick the landing for a reversal.
Number 4 is still about the day of the reversal, which is a Cover high / Cover low made with optimal strength (most likely) and only divergences have a luxury of dying slowly and temporarily running out of momentum without printing a Cover low / Cover high at the low / high.
Let’s conclude here that momentum trading starts with a daily 18-sample stochastic reading and monitoring for Cover highs / Cover lows as well as keeping an eye out for divergences that are brought on by excessive strength.

Your first piece of information derived from the daily chart therefore is that there was a red Cover high most recently meaning that the daily momentum is down.