The definition of an downtrend is pretty much standard. In an downtrend, we look for a series of lower highs followed by a series of lower lows. Two LH followed by at least another two LL is enough to define an downtrend.
A lower high is simply a swing low point that is lower than the previous swing high. While a lower low is simply a swing low that is lower than the previous swing low.
All momentum traders know that the trend is our friend. But without momentum behind the trend, we might actually not have any trend.
For active traders, we also look at the actual price action in order to gauge momentum. Besides reading the best .
Step #2: In an Downtrend Look for Bold that Close Near the Lower End of the .
A concept is that you want to use multiple confirmation signs when buying and selling. This will increase the likelihood that’s a high probability trading setup.
In this regard, the momentum trading strategy besides using the best , also incorporates the price action.
A practical way to read momentum from a price chart is to simply look at the length. What we want to see in an downtrend is big, bold that close near the lower end of the .
Now, it’s time to focus on the . This is the best . Which brings us to the next step of our strategy.
Step #3: Wait for the best to get overbought (above -20). Then rallies below the -50 level before Selling .
We’re going to use , the best in a smart way. In an downtrend, we sell after the best has reached overbought conditions (above -20). And then rallied back below the -50 level.
Now, we have confirmation from both the price and the best . The real momentum is behind this trend and the probabilities are in favor of more downside prices from here on.
Note* If the best continually stays in oversold territory (below -80 level), it signals a strong momentum and conversely a strong trend. Inversely the same is true in a uptrend.
The next important thing we need to establish is where to place our protective stop loss.
Step #4: Place Your Protective Stop Loss above the Recent Lower Low.
We want to hide our protective stop loss. It is above the most recent lower low level that formed right before the best momentum trading strategy issue the sell signal.
Alternatively, you can also trail your stop loss above each most recent lower low. This strategy will allow you to lock-in the potential profits in case of a sudden market reversal.
Last but not least the strategy also needs a place where we need to take profits, which brings us to the last step of the best momentum trading strategy.
Step #5: You pick your own TP strategy or
Take Profit once we break above the Previous Lower Low
A trend in motion can stay in that state longer than anyone can anticipate. And since we want to maximize our potential profits we let the market tips it hands before liquidating our trades. In this regard, we look for a break in the trend structure. Respectively a break above the most recent lower low.
Alternatively, you can take profit once the best breaks above the -50 level.
Note** The above was an example of a SELL trade using the Best Momentum Trading Strategy. Use the same rules for a BUY trade.