Momentum trading is a simple yet powerful strategy that has helped many traders achieve consistent profits across Forex, stocks, commodities, and indices. This method is built on one core belief: assets that are moving strongly in one direction are likely to continue moving that way — at least for a while.
Instead of trying to predict reversals, momentum traders ride the wave. Think of it as joining the winning team while they’re still winning.
What is Momentum Trading?
Momentum trading is based entirely on technical analysis of historical price data. Traders measure an asset’s recent performance and use it to determine whether to buy or sell.
- If the price is rising, buy (go long).
- If the price is falling, sell (go short).
It’s important to note that momentum trading is a continuation strategy, not a reversal strategy — you’re looking to follow the existing move, not call the top or bottom.
Types of Momentum Trading Strategies
1. “Best of” Momentum Trading
Here, you scan a group of assets (your universe) and select only the top performers to trade.
Example:
If your universe includes EUR/USD, USD/JPY, gold, S&P 500, and US Treasury yields, you might:
- Go long the strongest gainers.
- Go short the biggest losers.
This method narrows your focus to high-conviction trades and avoids spreading yourself too thin.
Pros:
- Academic research shows it can outperform broader strategies.
- Fewer trades mean less overtrading and lower costs.
Cons:
- You might miss good moves in assets that just missed your “top performer” cutoff.
2. Time Series Momentum
This classic approach doesn’t just pick the “best” assets — it trades all assets in your universe based on whether they’re up or down over a set look-back period.
Example:
- If EUR/USD is up 1.77% in the last quarter → Long.
- If USD/JPY is down 5.81% → Short.
You can also add filters — for instance, only trading assets that moved more than 5% in the look-back period — to improve results.
Pros:
- You won’t miss momentum moves.
- Simple and easy to follow.
Cons:
- Can produce too many trades.
- Risk of overexposure to correlated assets.
How Momentum Trading Works
- Build Your Trading Universe
Include diverse assets (Forex pairs, indices, commodities, etc.) for better opportunities. - Set Your Momentum Criteria
Use indicators like RSI, MACD, Stochastic, or moving averages.- Example: Go long when the 20-day RSI crosses above 60, short when it crosses below 40.
- Consider Multiple Timeframes
For stronger signals, align momentum on both a long-term and short-term chart. - Position Sizing & Stop Loss
Risk a fixed % of your account per trade. Use volatility measures like ATR for stop loss placement. - Exit Strategy
Use trailing stops to ride big trends while locking in profits.
Pros & Cons of Momentum Trading
Pros:
- Proven profitability in research and real-world trend-following funds.
- Clear rules make it easy to automate.
- Works across multiple asset classes and timeframes.
Cons:
- Low win rate — expect losing streaks.
- Doesn’t work well in choppy, sideways markets.
- Can involve slippage when entering fast moves.
Momentum Trading Tips for Forex
- Trade liquid pairs: EUR/USD, USD/JPY, GBP/USD.
- Look for breakouts above/below 50-day highs/lows (or 300-period on H4 charts).
- Best times for entries: London & New York sessions.
- Avoid sideways markets — momentum thrives in trending conditions.
Example Strategy:
- EUR/USD breaks 50-day high.
- Confirm with RSI > 60 on both H4 and daily charts.
- Enter during London session.
- Use ATR-based stop loss, trail as trade progresses.
Bottom Line
Momentum trading is not about guessing — it’s about reacting to what the market is already doing. Whether you use the “best of” approach or the time series method, the key is to stick to clear rules, manage your risk, and accept that not every trade will win.
The goal is simple: ride the big moves, cut losses quickly, and let the market’s momentum work for you.