The Magic Momentum Method is a trading system discretionary based on RSI and Trend Lines.
TheMagic Momentum indicator: RSI
Weuse the Relative Strength Index (RSI) momentum indicator as our primeindicator when trading the 1 Indicator Simple Way of trading theForex Market. This indicator measures the momentum present in themarket – this means that it shows who is in charge – the bulls orthe bears. When the bulls are in charge the market is in a Buy phaseand when the bears are in charge the market is in a Sell phase. TheRSI that we use has a setting of 4. This means that the position ofthe indicator reading is based on the momentum information 4 candlesor time frames back. If we were to increase the setting to say 14 theindicator can become very flat and difficult to read. If we decreasethe setting to 2 then the indicator becomes too sensitive and thereadings become meaningless. So over timIn a normal sideways marketthe 50 or middle line on the indicator separates the bull (Buy) areafrom the bear (Sell) area. Above that line is the buy area and belowthe line is the sell area. e a setting of 4 has served us well. Wealso set 3 levels on the indicator. The 25, 50 and 75 levels.
Sometimes thebulls are so strongly in charge in an upward trending market that wecredit them with more than 50% of the area. We allocate 75% of thearea to them (everything above the 25% line) as they have been sodominant that the bears will take some time to recover theirstrength. So only when the indicator drops below the 25% line will weconsider as a sell.
Sometimes theBears are so strongly in charge in a downward trending market that wecredit them with more than 50% of the area. We allocate 75% of thearea to them (everything below the 75% line) as they have been sodominant that the bulls will take some time to recover theirstrength. So only when the indicator goes above the 75% line will weconsider as a buy.
Trend Lines
As you can seeby adopting this dynamic bull and bear area approach, it keeps us “inthe trend” longer and therefore creates less whipsaws (unnecessaryand unprofitable buy and sell transactions). It also turns a momentumindicator which normally is best used in a sideways market, into atrending indicator at the same time.
When theindicator moves from (say) a sell area to the buy area, it is asignal that we should consider changing from a sell (if we were inone) to a buy transaction or entering a buy.
TRENDLINES TheRSI indicator measures momentum which is the same as the marketsentiment. However the price chart always reflects reality. So themomentum indicator on its own is not enough to be the main triggerfor a transaction. It merely provides the motivation and evidence fora transaction but the main trigger to enter deals comes from thePrice chart when trendlines are violated. We like to use trendlineviolations by the price as the main trigger to enter transactions(deals). A trendline is nothing more than joining a number of swinglows to produce a support trendline. When using swing highs in thesame way it creates a resistance trendline. Trendlines can also bedrawn on the RSI indicator. The bigger the angle of the trendline themore aggressive (less reliable) the trendline becomes. The purplelines below are less aggressive than the red lines which have beendrawn at steeper angles. Often trendlines on the RSI warn us that weshould be looking for aggressive trendlines on the price chart.
Our main methodof entry is when the price crosses over a price trendline after beingwarned about it by the RSI crossing over an RSI trendline or over thebuy / sell dividing line. Remember that this technique is all aboutmaking sure that you (your transaction) are facing in the rightdirection when a trend develops. When you are is such a trend thetechnique applies risk management that is aimed at ensuring that youstay in the trend on hopefully a risk free basis.
The Entry
The system basically works like this:- 1. When the RSI starts showinga move from (say) the buy area to the sell area and/or has atrendline violation, we would immediately look for 2. A trendline onthe price chart which is being violated (if we have not already drawnone in). As the trendline is violated we would then enter a selltransaction. In a fast moving (volatile) market we will enterimmediately. In a slow market we may wait for more confirmation bywaiting for the 1 minute candle to close and a new 1 minute candle toopen. Below is an example of a sell transaction.
See more examples later in the book. This system can be a continuoussystem in that the entry triggers can also be the exit triggers for aprevious transaction. The exit trigger for one transaction can alsobe the entry trigger for the next transaction.
Managing andexit
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 lossshould be implemented at the same time or immediately after entering.Experienced and disciplined traders can trade with a mental stop ifthey have confidence to do so. Sometimes deals just do not perform asexpected and may not even go positive and will be stopped out at - 16pips. If this happens we just have to wait for the next tradingsignal. Using this method you will find that your stop is seldom hitas you are more likely to change the direction of your trade beforeit reaches your 16 pips stop. The stop includes the spread so if thespread is 2.8 your effective stop is only 13.2 pips (16 pips less thespread of 2.8). Once a deal is active and going positive we managethe transaction in a number of ways depending on the tradingconditions. Based on the 1 minute chart method we could use any ofthe techniques below. You could close the transaction the minuteyou see a strong signal to trade the other way. This is a very commonreason to exit at either a profit or a loss and this reason alsoprevents your stop loss being hit. You could close 50% of thetransaction at between +5 and +10 pips and move the stop to breakeventhereby creating a risk free deal for the remaining 50%. Hopefullyyou will have caught a trend and the price will continue to tradeaway from the entry price. You could close 50% of the transactionat between +5 and +10 pips and move the stop to -4 or -9. Thisensures a small profit if your stop is reached but gives thetransaction enough room to become part of a larger trend. Hopefullyyou will have caught a trend and the price will continue to tradeaway from the entry price. You could close the entire transactionat say +10 or +15 if that is what you would be happy with. If youhave caught a trend (the price has gone +15 pips on the 1 minutechart) You could use the RSI 75% or 25% exit method (See later inthe book) You could use the 15 Moving average crossover method(see later in the book) When trading the 1 minute chart, experimentwith these exit techniques to find the conditions which make eachbetter to use.
Alternativeexit
Thesignals and triggers used to enter this technique are also very goodexit signals. Besides being signals to exit trades they can be usedto enter the next transaction too. The idea behind this technique isactually to make sure that your transaction is pointing in the rightdirection when a good trend occurs and to stay in the transaction aslong as the trend continues. The 1 minute chart is a very sensitivechart and ideally it should best be used as an entry chart to enterlonger and stronger trends. An advanced exit technique is to use amoving average crossover to exit a trade entered on the 1 minutechart. In this respect the 15 period, smoothed, moving average basedon the close price can be used. This advanced exit techniquewill only be used once you are happy with the basic approach. The wayof adjusting the bull and bear areas as discussed previously comesclose to achieving the same result as using the above moving average.
Whento trade
Thebest 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 NewYork).
Summary
Thetechnique is: Identify entry opportunities:
Seea trendline violation or a 50 line violation on the RSI
Lookfor a corresponding trendline violation on the price chart.
Enterthe deal
Exitingthe deal using any of the techniques below:
1.Your stop is hit ( this is an involuntary option which should nothappen that often)
2.You reverse the direction of your trade whether you are positive ornegative.
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. Whenin 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 thetrading skills to identify trading opportunities quickly, enter dealsefficiently and make a profit. As your trading experience increases:-you can investigate and apply filters that will make the techniqueeven better and you can move onto longer time frames – please tryto 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 Buyon a RSI trendline and 50 line violation and a price trendlineviolation. 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 25level. Result +5 +50 = +55 pips in 70 minutes. Ended the day’strading.
