Online Trading: Five Powerful Concepts Shows You How To Use Momentum Properly and Make Sure You Are Taking Trades In The Right Direction
Times have changed dramatically since those original TV commercials promoting those useless “Red Light”/“Green Light” Online Trading Systems that gave so many false signals that people kept losing money and they quit online trading altogether. If those people knew how to interpret price trend and price swing momentum strength, they might still be trading today. The concepts outlined in this article will be one of the most important concepts you will need to learn if you want to truly be successful in online trading, day trading, intraday momentum trading and/or futures trading.
Today, especially in this market of huge volatile swings, online trading can provide you with the opportunity to make the market pay you “on the spot”, provided you follow some basic rules. Anyone, yes even the beginner trader, can turn online trading into consistent daily profit. Rarely, will a teacher properly define how to use momentum properly as an Intraday Online Trader. This is truly a topic for the seasoned online trader; however, ALL traders must properly understand how to use momentum properly when day trading online. Here are five powerful concepts on how you can use momentum properly as a successful online trader:
1. Price Patterns Have #1 Priority Within Either A Strengthening Trend or A Weakening Trend – Yes, I know that is a long statement. However, as an Intraday Online Trader, you must be able to identify WHEN the price swings are getting stronger (have increasing momentum) or getting weaker (momentum is slowing down). As a general rule, when you see wide or long price swings with a steep slope, that is an indication that momentum is increasing. That means that it is relatively safe to use trend trading strategies to enter and stay with a trade setup. Similarly, when you see small or shallow price swings with an elongated shallow slope, that is an indication that momentum is decreasing. Practically speaking, you should take profits when you see this happening. Notice I have not told you to “reverse” your position. Inexperienced traders falsely believe that if you have a weakening trend, it means that prices are most likely to reverse.
2. All Momentum Indicators Are Not The Same – Most traders do not take the time to understand exactly how each momentum indicator works. Some people say you should pick one indicator and learn how that one indicator works versus having multiple momentum indicators. Honestly, I have traded with just one indicator, never looking at price, for about six months. And then, I traded with another indicator, looking at price, for about six months. And now I use a few indicators looking at price. You can be successful any way…but, you do have to understand exactly how the indicator works. Is the indicator lagging price? Does the indicator lead price? Is the ‘coincident’ with price? With my advanced students, I show them how to use the various indicators such as the ADX, Stochastics, Commodity Channel Index, RSI and other less popular momentum indicators. Please take a look at the information at www.natebrooks.com for additional information. The concepts you need to interpret, as a confirmation of what price is telling you to do, are whether there is price convergence with the momentum indicator or price divergence with the momentum indicator AND whether the market is in the overbought or oversold conditions. Always remember, price dictates your primary online trading strategy and then, momentum confirms what to do within the price trend analysis. Also, don’t forget that you must have a price trend FIRST so you can enter a trade in the direction of the trend…then, you analyze the power strength of the trend to help you make a profit by setting the correct targets.
3. Divergence with Price…Does NOT Mean That Price Will Reverse – Please reread this section over and over until you truly understand what I am saying to you. When you have divergence (price going up while momentum is decreasing), price action will either have a retracement, consolidation or a reversal. Please note, if the price trend line for the first two swing pivot lows has not been violated, the first thought you should have when you see the divergence is that it most likely going to be a retracement. Too many traders “think” it means that the price will reverse and they attempt several losing trades trying to go short prematurely. This is a fast way to drain your account unnecessarily. Be patient.
4. Convergence with Price is the Best Confirmation You Can Discover – When the Price Action is “in gear” with the Momentum Indicator (meaning they are going in the same direction), this is the confirmation that you are looking for. Convergence confirms what the price trend is doing…and that tells you to stick with the trade strategy in the direction of the existing trend. This is how you stay with a trade when you are in a trade. This is one of the key secret advantages you have when online trading on a Intraday basis.
5. Draw Your Price Trend Line On Your Intraday Charts – When writing your trading rules, you want to know how you will follow price throughout the online trading day. Let’s say you are in an uptrend, draw the price from the first two swing pivot lows. Simply stated, do not go short until the price action crosses that trend line. Make your trading decisions based on price…then, confirm your decision with the momentum indicator. Momentum online trading strategies do not work well when price is in either a consolidation mode or a non-trending condition. Therefore, always make your first decision about what trade setups to take based on price action (you must first define whether you are in a price action trend) and then, look for convergence of price to ride the trend. If you see divergence, take profits and do not reverse your position until price crosses that trend and you have price confirmation of a opposite trend with price convergence in that new direction.
Following these five steps should definitely put you on the right track for turning your online trading experience into consistent income for yourself…every day! For additional information about online trading, please visit www.natebrooks.com.