Momentum Analysis – Part 2
Do you like what you are reading so far? I am sure you do, let’s continue by referring to the image below:
3Momentum Test 3: Overall size of breakout bar
The width or the size of the bar plays an important part. By size I am referring to pips between the High and Low price of the bar. In our example the bar is 15 pips wide. We want to see the breakout bar at least 10 pips or more wide. The longer the bar the better, at least in most cases. We will discuss later the times when the bar is too long.
Any bar which is less than 10 pips on a 15 chart does not represent market conviction. It is simply market noise and we are going to ignore such bars. Longer bars represent strength and that’s what we are after.
4Momentum Test 4: Point of exact entry based on breakout bar
This is very important. Once the breakout bar has closed we do not simply enter the market. We wait for the price to go past the high of the bar to enter the trade. For Long trades we add 2-3 pips spread and another 2-3 pips margin to the actual entry price. In the example above the high of the bar was 1.2870, we add 2 pips of spread and 3 pips margin and create a pending Long entry order at 1.2875
Short answer, fake breakouts. This is one way to overcome the situations when we there is fake breakout. By entering a few pips above the target we want to make sure that continues on with the move and that it wasn’t a fake breakout. This alone is not full proof and we need one additional check , the test #5.
Next section wraps the basic entry method. We have had some caveats which will look soon and also an advance entry method discussed a bit later. Up next Momentum test #5.