Elder’s Momentum

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Elder’s Momentum is one of the techniques, which Alexander Elder describes in his works (“Psychology, Trading Tactics, Money Management. New York: J. Wiley, 1993.”).  Strategy is based on the trend-following philosophy.

Strategy

Due to its simplicity, Elder’s Momentum can be used as a manual trading strategy and in automated trading systems. There are two primary indicators: Momentum is used as an oscillator which shows trend direction; Exponential MA combined with price patterns serves as a trigger for the trade.

Moving Average

Moving Average is a trend indicator. In this strategy, combined with candlestick patterns it serves as a trigger for the signal.

Momentum

Momentum refers to oscillator indicators, determines the speed and direction of the market trend. In other words, it measures the amount (amount in %) that the price has changed over a given time span. In the Elders Momentum strategy, it serves as a trend indicator.

Formula:

Momentum is calculated as a ratio of current price to the price N periods ago.

MOMENTUM = CLOSE(i)/CLOSE(i-N)*100

Where:
CLOSE(i) — closing price of the current bar;
CLOSE(i-N) — closing bar price N periods ago.

 

Setup

Most often this strategy is used for intraday trading on the 1H timeframe. Nevertheless, the strategy serves well for trading on timeframes higher than H4. However, the trader should always consider the macroeconomic events for the long-term investments. H1 (one-hour bars) timeframe is preferred.  Rules:

  • Any trading instrument is suitable. Volatile Forex majors are preferable (EURUSD, GBPUSD, USDJPY, USDCHF, EURJPY, AUDUSD)
  • To avoid the impact of market noise we recommend using time frames higher than 30 min;
  • Install Exponential Moving Average indicator with period 18 (EMA 19)
  • Install Momentum indicator with period 18 (Momentum 18)

Elder's Momentum Setup

Entry rules

Entry rules consist of three main part: Trend recognition; Signal trigger; Confirmation.  Trend recognition section uses Momentum indicator, as soon as Momentum crosses 100 level and stays higher – uptrend identified; if Momentum crosses 100 level and remains lover – downtrend determined.  Since the Momentum reacts faster to the price changes, when Momentum already shows an uptrend, the price will still be lower than the EMA. Trigger for the trading signal will be crossing of the EMA by the price.  An excellent addition to the Signal trigger would be the big size of the crossing bar (relatively to the closest ones). If the second bar, after the crossing, opens near to the top of the last price bar – signal is confirmed, and trader should open trade.

Buy signal:

  • Market is in downtrend or stagnating (Price lower than EMA, Momentum lower than 100)
  • Momentum crosses 100 level from below
  • Previous Price Bar closes higher than EMA (this bar should have larger size)
  • Current bar opens near High or Close price of the last bar and rising

Sell signal:

  • Market is in uptrend or stagnating (Price lower than EMA, Momentum above the 100)
  • Momentum crosses 100 level from above – down
  • Previous Price Bar closes higher than EMA (this bar should have larger size)
  • Current bar opens near High or Close price of the last bar and rising

 

 

Exit rules

The strategy allows several exit rules. There are three main types exit rules: exit by Stop Loss, exit by Take Profit and Early Exit rules.

Stop Loss

There are several rules to evaluate Stop Loss, which underlay different risk levels. Usually, Stop-Loss set to the support levels and pivot points. These rules are listed for the Buy signal, for the Sell signal rules should be vice versa.

  • Local minimum of the price for the period when Momentum was lower than 100 level
  • Closest lower Pivot Point
  • Minimum of the last bar (Suitable for the high time frames, H4, D1, W1)
  • Minimum of the current day (for intraday trading)

Take Profit

Take Profit is the desired level of profit and must correlate with Stop Loss level. One of the most important indexes of the strategy is relation SL/TP. This relation is called risk/reward level of the strategy.  (rules are for the Buy signal):

  • Local peak of the price (in a range of a trading week)
  • Closest upper Pivot Point
  • Maximum of the last bar (Suitable for the high time frames, H4, D1, W1)
  • Current price + k*Standard Deviation (Standard Deviation indicator stands for an average price motion; k between 0.5 and 1)
  • Current price + k*StopLoss (k between 1.5 and 3)

Early exit rules

There are two Early Exit rules for Elders Momentum strategy: exit by EMA and exit by Momentum.

  • Exit by EMA – close the trade if price crossed EMA. For Buy – close if price crosses from top to bottom; for Sell – crosses from bottom to top
  • Exit by Momentum – close the trade, when Momentum returns lower than 100 for Buy and higher for Sell.

Exit by EMA rule are more sensitive to market noises and can be triggered by false movements. However, also, can provide earlier exit and bigger profits. We recommend using exit by EMA for high volatility market and Momentum exit for low volatility periods.

Examples

Buy Signal

Elder's Momentum Buy

Buy signal on the EURUSD 1H. Stop Loss at the minimum of Momentum < 100 periods. Exit by the EMA rule.

Sell Signal

Elder's Momentum Sell

Sell signal on the EURUSD 1H. Stop Loss on the local maximum. Exit by the Momentum rule.

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