The Magic Momentum Method is a trading system discretionary based on RSI and Trend Lines.
The
Magic Momentum indicator: RSI
We
use the Relative Strength Index (RSI) momentum indicator as our prime
indicator when trading the 1 Indicator Simple Way of trading the
Forex Market. This indicator measures the momentum present in the
market – this means that it shows who is in charge – the bulls or
the bears. When the bulls are in charge the market is in a Buy phase
and when the bears are in charge the market is in a Sell phase. The
RSI that we use has a setting of 4. This means that the position of
the indicator reading is based on the momentum information 4 candles
or time frames back. If we were to increase the setting to say 14 the
indicator can become very flat and difficult to read. If we decrease
the setting to 2 then the indicator becomes too sensitive and the
readings become meaningless. So over timIn a normal sideways market
the 50 or middle line on the indicator separates the bull (Buy) area
from the bear (Sell) area. Above that line is the buy area and below
the line is the sell area. e a setting of 4 has served us well. We
also set 3 levels on the indicator. The 25, 50 and 75 levels.
Sometimes the
bulls are so strongly in charge in an upward trending market that we
credit them with more than 50% of the area. We allocate 75% of the
area to them (everything above the 25% line) as they have been so
dominant that the bears will take some time to recover their
strength. So only when the indicator drops below the 25% line will we
consider as a sell.
Sometimes the
Bears are so strongly in charge in a downward trending market that we
credit them with more than 50% of the area. We allocate 75% of the
area to them (everything below the 75% line) as they have been so
dominant that the bulls will take some time to recover their
strength. So only when the indicator goes above the 75% line will we
consider as a buy.
Trend Lines
As you can see
by adopting this dynamic bull and bear area approach, it keeps us “in
the trend” longer and therefore creates less whipsaws (unnecessary
and unprofitable buy and sell transactions). It also turns a momentum
indicator which normally is best used in a sideways market, into a
trending indicator at the same time.
When the
indicator moves from (say) a sell area to the buy area, it is a
signal that we should consider changing from a sell (if we were in
one) to a buy transaction or entering a buy.
TRENDLINES The
RSI indicator measures momentum which is the same as the market
sentiment. However the price chart always reflects reality. So the
momentum indicator on its own is not enough to be the main trigger
for a transaction. It merely provides the motivation and evidence for
a transaction but the main trigger to enter deals comes from the
Price chart when trendlines are violated. We like to use trendline
violations by the price as the main trigger to enter transactions
(deals). A trendline is nothing more than joining a number of swing
lows to produce a support trendline. When using swing highs in the
same way it creates a resistance trendline. Trendlines can also be
drawn on the RSI indicator. The bigger the angle of the trendline the
more aggressive (less reliable) the trendline becomes. The purple
lines below are less aggressive than the red lines which have been
drawn at steeper angles. Often trendlines on the RSI warn us that we
should be looking for aggressive trendlines on the price chart.
Our main method
of entry is when the price crosses over a price trendline after being
warned about it by the RSI crossing over an RSI trendline or over the
buy / sell dividing line. Remember that this technique is all about
making sure that you (your transaction) are facing in the right
direction when a trend develops. When you are is such a trend the
technique applies risk management that is aimed at ensuring that you
stay in the trend on hopefully a risk free basis.
The Entry
The system basically works like this:- 1. When the RSI starts showing
a move from (say) the buy area to the sell area and/or has a
trendline violation, we would immediately look for 2. A trendline on
the price chart which is being violated (if we have not already drawn
one in). As the trendline is violated we would then enter a sell
transaction. In a fast moving (volatile) market we will enter
immediately. In a slow market we may wait for more confirmation by
waiting for the 1 minute candle to close and a new 1 minute candle to
open. Below is an example of a sell transaction.
See more examples later in the book. This system can be a continuous
system in that the entry triggers can also be the exit triggers for a
previous transaction. The exit trigger for one transaction can also
be the entry trigger for the next transaction.
Managing and
exit
Based on the 1 minute chart method we trade with a 16 pip stop loss
(sometimes 14 in a nicely moving market) and no target. The stop loss
should be implemented at the same time or immediately after entering.
Experienced and disciplined traders can trade with a mental stop if
they have confidence to do so. Sometimes deals just do not perform as
expected and may not even go positive and will be stopped out at - 16
pips. If this happens we just have to wait for the next trading
signal. Using this method you will find that your stop is seldom hit
as you are more likely to change the direction of your trade before
it reaches your 16 pips stop. The stop includes the spread so if the
spread is 2.8 your effective stop is only 13.2 pips (16 pips less the
spread of 2.8). Once a deal is active and going positive we manage
the transaction in a number of ways depending on the trading
conditions. Based on the 1 minute chart method we could use any of
the techniques below. You could close the transaction the minute
you see a strong signal to trade the other way. This is a very common
reason to exit at either a profit or a loss and this reason also
prevents your stop loss being hit. You could close 50% of the
transaction at between +5 and +10 pips and move the stop to breakeven
thereby creating a risk free deal for the remaining 50%. Hopefully
you will have caught a trend and the price will continue to trade
away from the entry price. You could close 50% of the transaction
at between +5 and +10 pips and move the stop to -4 or -9. This
ensures a small profit if your stop is reached but gives the
transaction enough room to become part of a larger trend. Hopefully
you will have caught a trend and the price will continue to trade
away from the entry price. You could close the entire transaction
at say +10 or +15 if that is what you would be happy with. If you
have caught a trend (the price has gone +15 pips on the 1 minute
chart) You could use the RSI 75% or 25% exit method (See later in
the book) You could use the 15 Moving average crossover method
(see later in the book) When trading the 1 minute chart, experiment
with these exit techniques to find the conditions which make each
better to use.
Alternative
exit
The
signals and triggers used to enter this technique are also very good
exit signals. Besides being signals to exit trades they can be used
to enter the next transaction too. The idea behind this technique is
actually to make sure that your transaction is pointing in the right
direction when a good trend occurs and to stay in the transaction as
long as the trend continues. The 1 minute chart is a very sensitive
chart and ideally it should best be used as an entry chart to enter
longer and stronger trends. An advanced exit technique is to use a
moving average crossover to exit a trade entered on the 1 minute
chart. In this respect the 15 period, smoothed, moving average based
on the close price can be used. This advanced exit technique
will only be used once you are happy with the basic approach. The way
of adjusting the bull and bear areas as discussed previously comes
close to achieving the same result as using the above moving average.
When
to trade
The
best times are in the first 2 to 3 hours of Major market openings -
the Asian Market (9:00am Tokyo) - the European Market (7:00am GMT) -
the London Market (9:00am GMT) - the New York Market ( 8:30am New
York).
Summary
The
technique is: Identify entry opportunities:
See
a trendline violation or a 50 line violation on the RSI
Look
for a corresponding trendline violation on the price chart.
Enter
the deal
Exiting
the deal using any of the techniques below:
1.
Your stop is hit ( this is an involuntary option which should not
happen that often)
2.
You reverse the direction of your trade whether you are positive or
negative.
3.
You close 50% of your deal at +5pips and move your stop to breakeven
– mainly use this in slow markets.
4.
You close 50% of your deal at +5 pips and move your stop to -4 –
mainly use this in fast trending markets.
5.
The price moves over the 75% line on the RSI in trending markets
(markets that move +15 pips on the 1 min chart) when in a sell. When
in a buy, you would close your deal when it moves over the 25% line.
6.
The price crosses over the 15 moving average in a trending market.
Bear in mind this is a beginner technique to ensure that you have the
trading skills to identify trading opportunities quickly, enter deals
efficiently and make a profit. As your trading experience increases:-
you can investigate and apply filters that will make the technique
even better and you can move onto longer time frames – please try
to do this only once you are trading the 1 minute charts profitably.
Examples
Low range sideways day:
In this sessions 6 profittable trades.
A 1 trade day:- Enter a 2 lot Buy
on a RSI trendline and 50 line violation and a price trendline
violation. Cashed in the 1st lot at +5 and moved the stop to -5.
Cashed the 2nd deal in when the RSI indicator line moved over the 25
level. Result +5 +50 = +55 pips in 70 minutes. Ended the day’s
trading.
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