Momentum Tricks
Draw trend lines on the momentum
indicators themselves
This might sound a little
ridiculous since you would normally draw trend lines only on price action. But
this is a nifty lil’ trick that we wanna share with you. After all, it doesn’t
hurt to have another weapon in the holster right? You never know when you might
use it!
This trick can be particularly
useful especially when looking for reversals or breaks from a trend. When you
see that price is respecting a trend line, try drawing a similar trend line on
your indicator.
You may notice that the indicator
will also respect the trend line. If you see both price action and the momentum
indicator break their respective trend lines, it could signal a shift in power
from buyers to sellers (or vice versa) and that the trend could be changing. Oh
yeah! Break it down like a Michael Jackson video!
"My pain may be the reason for somebody’s laugh. But my
laugh must never be the reason for somebody’s pain."
By Charlie Chaplin.
"People often say that motivation doesn’t last. Well,
neither does bathing-that’s why we recommend it daily."
By Zig Ziglar
Momentum Tricks
Moving out of overbought / oversold
Let’s say you’re looking at a chart and you notice that the
stochastic has formed a new low while price hasn’t.
You may think that it’s time to buy because the indicator is
showing oversold conditions and divergence has formed. However, selling
pressure may remain strong and price continues to fall and make a new low.
You would have been pretty bummed out as trend didn’t
continue. In fact, a new downtrend is probably in place as the pair is now
forming lower highs. And if you were stubborn, you might have missed out on
this down move too.
If you had waited patiently for more confirmation that the
divergence had formed, then you could have avoided losing and realized that a
new trend was developing.
"If you are willing to do only what’s easy, life will
be hard. But if you are willing to do what’s hard, life will be easy."
By T. Harv Eker.
"The future belongs to those who believe in the beauty
of their dreams."
By Eleanor Roosevelt.
Momentum Tricks
Moving out of overbought /
oversold
Another trick would be to wait for
momentum highs and lows to hit overbought and oversold conditions, and wait for
the indicator to move out of these conditions.
The reason for doing this is
similar to that of waiting for a crossover – you really don’t have any idea
when momentum will begin to shift.
"Never give up. When your heart becomes tired, just
walk with your legs-but move on."
By Paulo Coelho.
Momentum Tricks
Wait for a crossover
But, you know what they say,
patience is a virtue. It’d be better to wait for the stochastic to make a
downward crossover as confirmation that the pair is indeed headed down.
A couple of candles later, the
stochastic did make that crossover. Playing that bearish divergence would’ve
been pip-tastic!
What’s the main point here? Just be
patient! Don’t try to jump the gun because you don’t quite know when momentum
will shift! If you aren’t patient, you might just get burned as one side keeps
dominating!
"If it’s not messy, It’s not real growth."
By Robin Sharma.
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By Bruce Lee
Momentum Tricks
Wait for a crossover
This ain’t so much a trick as it is a rule. Just wait for a
crossover of the momentum indicator. This would indicate a potential shift in
momentum from buying to selling or vice versa. The main reasoning behind this
is that you are waiting for top or bottom and these can’t be formed unless a
crossover is made!
In the chart, the pair showed lower highs while the
stochastic already made higher highs. Now that’s a bearish divergence there and
it sure is tempting to short right away
"Just keep moving forward and don’t give a shit about
what anybody thinks. Do what you have to do, for you."
By Johnny Depp.
"By doing what we are afraid to do because it’s beyond
our comfort zone, we grow in confidence."
By Robin Sharma.
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From the movie of FAST AND THE FURIOUS.
Momentum Tricks
While using divergences is a great tool to have in your
trading toolbox, there are times when you might enter too early because you
didn’t wait for more confirmation. Below are a couple of tricks that you can
make use of so that you have more confirmation that the divergence will work
out in your favor.
"If someone offers you an amazing opportunity and
you’re not sure you can do it, say yes-then learn how to do it later."
By Richard Branson.
"Your mastery depends on focus, patience and practice.
Not on luck."
By Robin Sharma.
How To Trade Divergences
If you decided to sit that one out, you might be as bald as
Professor Xavier because you pulled out all your hair.
Why?
Well the trend continued!
Price bounced from the trend line and eventually dropped
almost 2000 pips!
Imagine if you had spotted the divergence and seen that as a
potential signal for a continuation of the trend?
Not only would you be sipping those margaritas in the
Caribbean, you’d have your own pimpin’ yacht to boot!
"Take risks and conquer your fears."
By Unknown Author.
How To Trade Divergences
If you had answered yes to that
last question, then you would have found yourself in the middle of the
Caribbean, soaking up margaritas, as you would have been knee deep in your pip winnings!
It turns out that the divergence
between the stochastic and price action was a good signal to buy. Price broke
through the falling trend line and formed a new uptrend. If you had bought near
the bottom, you could have made more than a thousand pips, as the pair
continued to shoot even higher in the following months.
Now can you see why it rocks to get
in on the trend early?!
Before we move on, did you notice
the tweezer bottoms that formed on the second low?
Keep an eye out for other clues
that a reversal is in place. This will give you more confirmation that a trend
is coming to an end, giving you even more reason to believe in the power of
divergences!
"The future depends on what we do in the present."
By Mahatma Gandhi.
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How To Trade Divergences
Next, let’s take a look at an example of some hidden
divergence. Once again, let’s hop on to the daily chart of USD/CHF.
Here we see that the pair has been in a downtrend. Notice
how price has formed a lower high but the stochastic is printing higher highs.
According to our notes, this is hidden bearish divergence!
Hmmm, what should we do? Time to get back in the trend?
Well, if you ain’t sure, you can sit back and watch on the
sidelines first.
Hidden Bearish Divergence on Daily chart of USD/CHF
"The way you do one thing defines the way you’ll do
everything. Every act matters."
By Robin Sharma.
"There is no elevator to success. You have to take the
stairs."
By Jody Hedlund.
How To Trade Divergences
If you had answered yes to that
last question, then you would have found yourself in the middle of the
Caribbean, soaking up margaritas, as you would have been knee deep in your pip winnings!
It turns out that the divergence
between the stochastic and price action was a good signal to buy. Price broke
through the falling trend line and formed a new uptrend. If you had bought near
the bottom, you could have made more than a thousand pips, as the pair
continued to shoot even higher in the following months.
Now can you see why it rocks to get
in on the trend early?!
Before we move on, did you notice
the tweezer bottoms that formed on the second low?
Keep an eye out for other clues
that a reversal is in place. This will give you more confirmation that a trend
is coming to an end, giving you even more reason to believe in the power of
divergences!
"Don’t chase people. Be yourself, do your own thing and
work hard. The right people-the ones who really belong in your life-will come
to you. And stay."
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