Momentum
Cycles
Neophytes quickly fall under the spell of fast moving
markets. However, trading momentum is far more difficult than most participants admit.
When the emotional crowd ignites sharp price movement, greed clouds risk awareness. The
inexperienced trader reacts foolishly and chases positions just behind the big volume,
where odds of a reversal quickly increase.
Prices rarely move in a straight line. As shocks
destabilize a market, counter force emerges to restrain price back toward its stable
state. An inevitable backward reaction follows each forward impulse. Burning the fuel of
the crowd’s money, markets seek equilibrium before proceeding with the next price
thrust.
Unskilled traders fail to consider this cycle when
entering momentum trades. They blindly execute positions with a common and dangerous
strategy: market entries on accelerating thrusts. Lacking
trailing stops and effective risk management, both good and bad positions bleed money as
sharp countertrends destroy profits. As these inevitable reactions wind down, losses
escalate as blind fear chooses the exact turning point to finally get out.
Consider both action and reaction when developing
effective momentum trades. This demands complex planning and detached execution. One
successful strategy requires trading opposite to natural bias: entries on counter
trend reactions and exits on accelerating thrusts. This aligns positions to the
underlying trend but against the current crowd emotion. Entries into accelerating momentum
can also work when tight stops are placed and the trader exits into further
acceleration. This eliminates risk associated with the inevitable pullback.
Choosing the wrong action-reaction trigger produces
frustrating results. Every trader knows the pain of executing a low risk entry, riding a
profitable trend, then losing everything on a subsequent reaction. Avoid this experience
using clearly defined tactics to minimize emotional momentum trading. Supplement this
discipline with multi-trend technical analysis and cross-verification to identify
profitable swing-points and locate natural escape routes.
