5-Minute Momentum Trading Strategy

Introduction

I am not a huge fan of short-term trading strategies because it can be hard work just trying to overcome the spreads.

For example, if you like to trade the USD/JPY pair and your favored broker has a 4-point spread, then you obviously need to make 4 points profit just to break even.

Nevertheless I thought I would share with you a simple forex trading strategy that I originally posted to a previous blog that I used to run back in 2008 because it seems to work just as well today if you wait for the right set-ups.

Momentum Trading Strategy

Momentum trading works well because it gets you into a trade when the market is moving strongly upwards or downwards with real momentum, and with this particular strategy you will be looking to enter a trade when the price breaks upwards or downwards after a period of indecision.

That’s because you will often find that the price will continue moving in the same direction due to the initial momentum of the breakout.

The criteria are as follows:

• 3 consecutive candles on the 5-minute chart where the body is very small
• strong breakout candle where the body is much larger than the 3 previous candles
• enter position (with the trend) at closing price of breakout candle
• target price = 1-2 times the body of the breakout candle
• stop loss = high or low of the breakout candle

The first point is very important. You need to see at least 3 consecutive candles where the price has closed close to its opening price because this is basically telling you that the buyers and sellers are cancelling each other out, and more importantly, the price is gearing itself up for a breakout.

This 5-minute price chart of the EUR/USD pair taken from my original post back in 2008 shows you 4 profitable trades from a single day using this 5-minute momentum trading strategy:

Best and Worst Times to Use This Strategy

The drawback of this strategy is that it will only work when you have a reasonable amount of volatility.

Therefore I would say that the best times of the day to use this 5-minute momentum strategy would be the opening hour of the London session between 8.00 and 9.00 GMT, and the opening hour or two of the New York trading session because this is when you will often see some decent price swings.

The worst time of the day to use this strategy would be the overnight trading session and any time of the day when the markets are quiet and the price is barely moving.

Other Factors to Consider

To increase your chances of success even further, you should also only trade pairs that have a high average daily trading range, as indicated by the ATR indicator on the daily chart, and pairs that have low spreads of no more than 2-3 pips at the most.

Final Thoughts

Some of the most profitable traders generate the bulk of their profits from simple price action strategies, and this is another example of one such strategy that doesn’t require any indicators at all.

All you need to do is to plot a simple candlestick chart and wait until you see 3 candles in a row where the body is very small, and trade the subsequent breakout.

Of course not all of these trades will be profitable, as with any trading strategy, but if you use sensible profit targets and stop losses, and only trade the major currency pairs at the busiest periods of the day, you will hopefully come out ahead in the long run.