The Tycoon Report

Momentum—Advantage of utilizing the right way in your trading

Momentum -- what is it and how is it used for trading? Most traders hear about momentum in their studies of the markets, however, few really understand the value of price momentum or how it affects their trading methodology.

Momentum is basically a measurement that we use to gauge how much strength there is in a particular price movement. For example, if you are entering a long position, is there enough strength in the movement for price to continue upwards? Or is there weakness in the price movement, thereby causing price to cease its upward movement? If there is strength to the movement (momentum) then you can take more profit. However, if there is weakness in the movement, then you will need to take profits quicker.

While this sounds easy to do, measurement of momentum alone can be misleading. Markets often have a quick up thrust only to return to the prior downwards movement. So how can you tell if there is true strength in the movement -- by measuring the strength of what causes the movements themselves -- buyers and sellers in the market.

The Hawkeye Heatmap shows when there is a bias to the upside or downside (dark colors), as well as confirms when momentum comes into a market (represented by bright colors). However, we then need to look to the Volume indicator to confirm the momentum strength. Are buyers increasing? Or are sellers able to immediately take back control?

In the image below, we see that the chart starts out with the HeatMap in bright red, showing momentum to the downside.. However, when we look to the volume indicator, we know that the movement is in trouble, because sellers are not increasing, and the next bar prevents entry because when the price opens it goes upward (momentum to the downside results in price going downward). We sit on our hands waiting for further indication that price will move downwards.

http://www.hawkeyetraders.com/images/Momentum

Price then continues upwards, the HeatMap goes green, and the volume indicates that buyers are coming into the market. The pivots then give us a vital piece of information -- lower highs in an uptrend. We may be in trouble. Again, we look to the volume indicator. Buyers are not controlling the bars -- instead for every buyer there is a seller. A few bars later, the trend dot goes flat showing a loss of momentum and we realize that buyers are decreasing and with buyers decreasing there will not be enough strength to break the pivot resistance points -- eliminating the possibility of taking more profits out of this market. We settle for a break even trade.

We then notice that sellers are entering the market, six bars later the HeatMap goes bright red again, indicating momentum to the downside. However, we are not in the clear yet because it seems that sellers are stalling. As we continue to watch the Pivots, we are making lower highs and lower lows. Although, the sellers seem to be having some difficulty, the market is behaving as we expect it to. Then sellers start increasing -- now we know we can take more profits out of the market because sellers are controlling price.

http://www.hawkeyetraders.com

Educate – Visualize – Transform!