Trading strategie: Momentum Squeeze

Description

The Momentum Squeeze (MOMS) strategy is a day trading strategy. The strategy can be applied in different time frames. A 30-minute time frame is the most popular. MOMS combines the useful concept of ‘momentum’ with a strategy called BB Squeeze. BB Squeeze, and as a consequence also MOMS, identifies intervals of very low volatility based on the relationship between Bollinger bands and Keltner bands. The MOMS strategy merits to be studied in detail.

Some traders use the MOMS strategy for shares. In the case of shares it is advisable to only use the strategy for swing trading by working on charts with time frame 1 day.

 

  
Suitable for : Market indices (FTSE, CAC, DAX ...)
: Forex (EUR/USD, GBP/USD …)
: Shares
Instruments : Futures, CFDs and Forex
Trading type : Day trading
Trading tempo : Medium - 0 to 4 signals per day depending on time
  frame and instrument
The strategy : Video
Using NanoTrader Full : Manual or automated Video

 

The strategy in detail

When to open a position?

The MOMS strategy combines volatility (price fluctuations) and momentum (the speed of price changes). When the volatility is low for a continued period of time, traders assume that a break-out is imminent. The volatility is judged by the relationship between the Bollinger bands and the Keltner bands. However, simply opening a position on the occurrence of continued low volatility is premature. This is where momentum comes into play. Given that a break-out is usually characterized by accelerating price changes, the relevant momentum might indicate when a break-out of the low volatility interval is starting.

In the chart periods with low volatility are shown as solid, red lines. The momentum is shown as a green histogram. Signals occur when this histogram crosses the zero line upwards or downwards during a period of low volatility.

 

In this example the momentum crosses the line upwards. This is a buy signal. The trader does not buy immediately upon the cross occurring. He waits for confirmation. Only when candle  A is complete a position is bought at the opening price of candle B.


 

This example is similar to the previous example. A buy signal occurs when the momentum histogram crosses the zero line during a period of low volatility. A position is bought at the opening price of candle B.


 

In this example there are two periods of low volatility. During neither period the momentum histogram crosses the zero line. So in both cases there is no trading signal.


 

In this example the momentum histogram crosses the zero line at the same time when a period of low volatility is identified. This is not considered a signal to open a position. The longer the low volatility continues, the higher the probability of a break-out. Hence it is not necessary to act upon these premature signals when low volatility has just been identified.


 

In this example the timeframe is set at 4 hours. The first time the momentum crosses the zero line coincides with the beginning of the low volatility period. This is not a signal. No position is opened. The next signal is a buy signal. This is a valid signal.


It is possible that within the same period of low volatility two or more buy/sell signals occur. All these signals can be acted upon on the condition that the open position based on the last signal has been closed.

Attention. MOMS is at its best after a continued period of low volatility. This frequently occurs on those CFDs which quote 24h/24 (CAC, DAX, AEX, Nikkei, SP 500, Nasdaq, Dow Jones en FTSE 100). In the morning, when the markets become active again, these 24h CFDs will often show a nice break-out. This break-out can be exploited with the MOMS strategy.

When to close a position?

The MOMS strategy uses a target price and a stop. Both target and stop are determined on the basis of the ATR (average true range). The ATR reflects the intrinsic volatility of a financial instrument. Each instrument has a different ATR. The ATR is not constant, it evolves over time. When determining target and stop traders should aim for a return/risk ratio of two or more. If, for example, the target is set at as 2x ATR 14 then the maximum stop is 1x ATR 14.

This example shows a target of 2x ATR and a stop of 1x ATR. The target is reached. The position is closed with a profit.

Attention. The WHS_ATR_Bands tool calculates 1/2 , 1 , 1 ½ and 2 ATR bands above and below the candle on the basis of the high and low of the candle. Traders can also calculate their ATR-based targets and stops on the basis of their entry price.

 

Conclusion

The MOMS trading strategy detects intervals characterized by low volatility and accelerating price changes. The strategy can be applied in different time frames and is suitable for day trading and swing trading. Market indices, forex pairs and shares can all be used for trading.

Practical implementation

In NanoTrader Full follow these steps:
  • Choose the instrument you wish to trade.

  • Open a chart with the study "WHS MOMS".

  • The strategy is set-up for position exits based on the Slow Stochastics.