Managing Momentum Trading (2)
Perfect Entry Time
The best deals with Momentum occur when news shocks, triggering a rapid move from one price level to another. In turn, this triggers a sell or buy signal for traders who jump in and get results with instant gains. A collection of capital uses other momentum to enter as the trade grows, resulting in a counter swing. The hot money population eventually reaches an extreme point, triggering volatility and forming whipsaw and reversal direction.
Early positions offer the greatest returns with less risk, while the old trend should be avoided at all costs. The opposite happens in a real-world scenario because most traders do not see the opportunity until it’s too late in the cycle and then fail to act until everyone jumps in.
Position management takes time to master it because these stock assets often carry a wide spread bid / ask spread, thus requiring greater movement to achieve profitability while also milling through a wide intraday range that exposes stop loss, even if the technique remains intact.
Choose your shelf life wisely as the risk increases the longer you stay in that position. Daily trading works well with momentum strategies, but forces players to take bigger positions to compensate for the potential for larger multiday profits. Instead, it is best to reduce the size of the position while holding multiple sessions to allow for greater movement and stop further placement of the current trading action.
Exit position as the price moves quickly to a technical state that is too large, often identified by a series of vertical bars on a 60 minute chart or a price that breaks the third or fourth standard deviation of the top 20 or lower Bollinger Bands. Tight the stop level or consider the exit strategy when technical obstacles are touched like the main trend line or previous high / low level. Exit or take a partial advantage when crossover signals a potential trend change.