What is a Momentum Trader?
Momentum trading is ideal for impatient traders. Momentum trading is when a trader looks for momentum and a currency that is moving in a specific direction and jumps in hoping that momentum will continue. These traders look for high volume and significant movement in one direction or another. When the currency starts to lose, that momentum is when the trader exits quickly.
A momentum trader is a specific type of day trader. These traders make their decisions based on a plan in which they try to predict market trends. As the market is picking up they jump in and hopefully jump out before the market drops again below where they opened their position.
Some momentum traders act based on news and events in the market or with a currency or stock. When the news becomes public, the momentum trader watches for the movement to start and opens the position. Based on the news, they expect the currency to continue in that direction for short period of time and as soon as the momentum trader sees movement in the opposite direction the exit the position.
Momentum traders are constantly watching the movements of the market. They do not take their eyes off the market for a second because they can miss their moment. Momentum traders need platforms and brokers with as close to instantaneous turnaround time as possible. A few seconds can make a big difference in the profits of momentum traders.
The strategies of momentum traders vary greatly. Some momentum traders use a strategy called a 5 minute momo. Those traders look at very short term charts. They are looking for a burst of action that will happen in a 5-minute time period. They look at the Exponential Moving Average or EMA and the Moving Average Convergence chart. These trades take place in two steps, the first one allowing the trader to break even and the second to be risk less because the trader broke even in the first part of the trade. The momentum trader using the 5 minute momo strategy will have specific rules for a long trade and opposite ones for a short trade.
The “best of” Momentum trading strategy is another common strategy for momentum traders. They will research which pairs have moved the most over the last several weeks. Then the trader looks to trade those pairs and based on the direction of the movement for those pairs will decide to trade them long or short. This strategy uses Moving Average rules and each trader can choose which charts they feel best indicates the movement they want to see.
Stop losses must be managed carefully in such short-term trading. This can be done manually or automatically. It’s important to have strict risk management rules because momentum trading depends on volatility which can be dangerous. Position management is just as important. When you have too many positions open, they can be hard to watch closely and you could miss important opportunities. As always, make sure to do thorough research before becoming a momentum trader.