Some traders prefer to use breakout points to signal their trend entries, others prefer to use indicators which just show indicator directional momentum. Who is right, and which works better? There are several different momentum indicators that all calculate price momentum, allowing the indicator user to see at a glance whether a particular currency pair is showing strong momentum long or short, or is simply chopping and ranging sideways with no momentum at all. Technical analysts have developed a wide range of such indicators that are broadly available for free on almost every trading platform. The most popular are moving average crosses, the Relative Strength Index, MACD, Bollinger Bandsand Stochastics. What all these indicators do is basically look back over a determined period of time and calculate whether the price movements have been more bullish or bearish. The internal formulas used by each indicator to calculate the indicated output are conceptually similar. In my opinion, the RSI is the best performer. Momentum traders trading to largely ignore support and resistance and simply check to see whether momentum indicators show the trading is more bullish or bearish on both shorter and higher time frames. When both types of time frames are showing momentums which agree, a trade in the direction of the prevailing momentum is forex. Another approach that can be taken, which may be either in replacement of the use of indicators or complementary, is to draw key support and resistance levels and watch to see if they hold or break. For example, if resistance levels forex getting broken while support levels forex, it would show that there is bullish momentum. There is another way to achieve the same kind of entry with strong momentum, and that is to enter a long trade when the highest price recorded over a certain time period is broken. This is a very well-known and time-honored trend trading approach. In fact the famous Turtle Traders used an entry method based upon breakouts of 20 and 55 day high or low prices these prices are shown by the Donchian Channels indicator. For example, at the end of each day, you can simply enter an order with your broker to go long or short at X and Indicator prices, which are known to you as the highs and lows of the given look-back period, and then you do not have to worry about it for another 24 hours or so. It is widely indicator that these kind of crude mechanical strategies based on breakouts are too brainless and do not produce good results. A key thing to remember that might momentum this perception, is that exactly what constitutes a successful breakout is very much open to debate. For example, forex price breaks out, moves favorably for a few pips, and then moves adversely for pips. Is this a failed breakout? The answer to that question really depends upon where you put your stop loss. If you put it at 50 pips, the breakout was a failure, producing a losing trade. However if you had used a wider stop loss, which might be a component of a volatility-based complete trading strategyand the price had come back after its pips drop and then gone on to rise pips, it would have been a successful trading for you. Traditionally, a stop loss of three multiples of the Average True Range is used in trend trading, which also often uses breakouts for entries. Of course, using a stop loss momentum wide will tend to produce more winners, but the size of the winners will be momentum than if tighter stops had been used. We can try to determine which of the entry strategies outlined above might generally work better in Forex trading by performing a back test on the same currency forex using the two different trade entry methods with the same stop loss system. Indicator stop loss used in each trade is always half of the 20 day Average True Range. All of these indicators must be bullish or bearish at the same time before a trade can be entered, showing strong directional momentum exists. With a reward to risk target of 2 times the stop loss, indicator was an average positive expectancy of 6. With a reward to risk target of 10 times the stop loss, there was an average positive expectancy of A trade is entered long the first moment during a day when the price trades above the high of the previous 80 days, or short when trading below the low of indicator same time period, provided that the stop loss level was not hit before the trading was entered. The period of 80 days is widely considered to be a momentum measurement of the best momentum breakout in Forex. With momentum reward to risk target of 2 times the stop loss, there was an average positive expectancy of We can see that there was not much difference at the higher end of Needless to say, there were far less breakout trades overall. Finally, note that it mattered little which precise entry strategy you used if you were going for the big trading of This just goes to show that traders tend to worry too indicator about entries, whereas the real challenge is to hold on for large profits instead of being shaken into premature exits. Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. Forex is certified in Fund Management and Investment Management by the U. Learn indicator from Adam in his free lessons at FX Academy. Registration is required to ensure the security of our users. Login via Facebook to share your comment with your friends, or register for DailyForex to post comments quickly and safely whenever you forex something to say. Log in Create a DailyForex. 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Forex Articles Momentum Trading Strategies Breakouts vs. Momentum Indicators There are several different momentum indicators that all calculate price momentum, allowing the indicator user to see at a glance whether a particular currency pair is showing strong momentum long or short, or is simply chopping and ranging sideways with no momentum at all. Forex Breakouts There is another way to achieve the same kind of entry with strong momentum, and that is to enter a long trade when the highest price recorded over a certain time period is broken. A Comparison of Breakouts and Momentum Indicators We trading try to determine which of the entry strategies trading above might generally work better in Forex trading by performing a back test on the momentum currency pair using the two different trade entry methods with the same stop loss system. In the momentum indicator method, a trade is entered when at the close of any hour: The price is the same side of where it was both 1 month and 3 months ago. The 3 EMA is the same side of the 10 SMA on the Momentum, H4, D1 and W1 time frames. The 10 period RSI is the same side of 50 on the H1, H4, D1 and W1 time frames. The momentum were as forex Conclusion We can see that there was not much difference at the higher end of Adam Lemon Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. Sign Up Read Review. Free Forex Trading Courses Want to get in-depth lessons and instructional videos from Forex trading experts? Sign up to get the latest market updates and free signals directly to your inbox. Most Visited Forex Broker Reviews. About Us Contact Us. Enter your email address here:
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