Momentum is the top ingredient in my TPS Setups.
Without it, none of the other pieces mean much.
Yet, most traders assume that because ‘trend-trading’ is so well-known it’s garbage.
Let me dispel that misconception and help you incorporate momentum into your strategy.
Just because something isn’t unique doesn’t make it useless.
But rarely does it work all by itself.
That’s where folks get lost.
They think there is one magic indicator or tool that will turn their account into a cash register.
While my LottoX indicator works wonders, it’s nothing without a clear trend.
Even when I trade reversal patterns I want momentum on my side.
So is momentum the holy grail?
Not by a long shot.
But it can improve your setups and here’s how.
What momentum really says
At the end of the day, markets move based on supply and demand.
Get buyers, then sellers, and prices rise.
When sellers outweigh the buyers, you get downward pressure.
Most people assume that you need lots of volume to move a stock.
That’s not entirely true.
You just need an imbalance.
The greater the imbalance, the more the price moves.
Momentum tells us the magnitude of that imbalance.
Combine that with volume, and you can see whether the trend is supported by big money or just random algos.
Let’s use an example from the crash back in March.
SPY Daily Chart
In the chart, there are two histograms (bar charts). The middle one shows the momentum and the bottom one the volume.
You can see that as markets started falling, momentum shifted lower and volume increased. That’s a sign of both participation and a trend change.
When we got to the bottom, volume sat near its highest levels. Yet, momentum turned as the red bars turned to purple.
This says markets changed their bias which was confirmed by the volume and momentum change.
You can see that once volume declined enough and momentum started to top out the market began to consolidate.
Because the market consolidated rather than go down, that told me the momentum was bullish.
If markets wanted to go lower, they would have done so with volume.
Instead, you had enough buyers step in over sellers to keep prices in check.
This type of analysis works on any chart, even if you don’t have volume.
It’s a big reason why my TPS setups rely on the big ‘T’ – Trend.
Trading against the trend is a fool’s game
Stocks take the stairs up the elevator down.
This premise means you should see chart consolidation moves higher more often than reversals.
And that makes sense when you think about it…there can really only be one reversal.
So what do you think is easier to spot before or as it happens – a reversal or continuation?
I want to use Tesla as an example.
TSLA Hourly Chart
We all know that Tesla finally topped out recently, but not before tearing up the shorts.
In this hourly chart well before the top, I want you to look at the top green arrow on the left.
If you were trying to pick out a top there, how would you know you were correct?
Most traders prefer to get some sort of confirmation first.
Assume you waited until the second green arrow on top for your entry with a stop above the highs.
If you did that, you’d already been fighting rising momentum that carried the stock higher for weeks.
Just take a look at the middle bar chart and you can see how the downward momentum got shallower over time, with the series of higher lows.
Not the least of which is the chart already started forming a continuation pattern by that point.
All this suggests a continuation higher than an actual top out.
Incorporating it into your strategy
Maybe you have a certain chart pattern, time of day, or whatever that works for you.
Have you ever looked at the broader trend in place for that stock?
Do yourself a favor – take whatever setup you’re working with and start noting the trend at a higher timeframe.
If you’re on the hourly chart, pull out to the daily and see if you can spot the trend.
Then log your trades and see if trading with the trend doesn’t lead to a higher probability of success.
I’m not guaranteeing it will because I don’t know your trading.
But, you’d be surprised what you might find.
Seeing it in action
I know many of you struggle to create profitable trades consistently.
That’s why I created my premier educational service LottoX.
With access to my trades and alerts along with weekly training, you get a direct link to my mind – seeing how I incorporate momentum into my trading.
Learn how I turned my $38,000 account into over $2,000,000 in two years.