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Momentum Trading Strategy: Entry and Exit Signals
Intro
In the crypto trading world having a strategy that addresses multiple aspects of this market is a must for every trader aiming to succeed. Momentum trading strategies offer a versatile approach under a wide range of options to enter and exit trades in the market successfully.
In this occasion, we will discuss the possible entry and exit signals traders can obtain while pursuing momentum opportunities, and how price action with technical indicators will boost the reliability of those signals.
How Does Momentum Trading Work In Crypto
Momentum trading plays under the rules of the volatility game, and this characteristic makes it highly suitable for crypto markets whose natural conditions derive from sharp price movements.
Beyond volatility, crypto markets carry special attributes that make it a unique environment riding momentum opportunities. The open-ness of this market to almost any person who desires to participate, regardless of experience, endows it with constant liquidity susceptible of being triggered at any moment, causing attractive price movements for experienced traders.
This liquidity often emerges from over-leveraged positions that are unsustainable during high-volume activity, leading to even more volatility seasons. Another aspect to remark on is the unregulated state of this market, allowing more notable manipulation. This is especially true for those more trivial assets, like meme coins, but that at the same time results are beneficial for traders capable of managing through such conditions.
Overviewing the basis for momentum strategy
Momentum trading is a strategy essentially pursuing directional movements of prices under the core idea that the direction will persist once the price has strengthened or established a trend.
Typically, traders would expect an upward move and to engage with a meaningful trend. However, nowadays, in the fast-paced environment of cryptocurrency trading, either direction is expected.
Day traders and scalpers are the main participants benefiting from momentum trading, but mid-term traders and long-term investors might also take advantage if they can get into a strong trend.
The momentum strategy stands out by offering a complete approach to trading, gathering various technical indicators like RSI, MACD, and Volume, and extending its application even further with price action concepts like breakouts, charts, and candlestick patterns.
Essentially, if we went to summarize the momentum strategy, we would state it is related and functional to:
- Market Volatility.
- Trending seasons.
- Price action and technical analysis.
- Day trading and scalping, primarily.
Basically, any insight from the price or confluence of indicators suggesting a strong signal in favor of a directional move might be considered for a momentum entry.
Entry and Exit Signals
Setting entry and exit rules for signals is a key factor for any successful strategy and its application. Momentum trading strategies are not exempt from that statement.
Let's try to outline some steps to follow when taking momentum signals and what role price action and technical indicators play.
Price Action Patterns
Candlestick engulfing patterns: Whether it occurs for the bearish side or the bullish side, an engulfing pattern reflects a shift in power from one side to the other. This essentially means that the contrary side has taken control of the market at a specific price level. For example, picture a market that is trending down and getting near to a support level, and then a larger bullish candle emerges, engulfing the previous bearish candle. This could be a signal for an uptrend momentum.
Support and resistance breakouts: The price breaking out through a resistance or support level can signal a trend continuation. Breakouts accompanied by an increasing volume are more reliable since false breakouts are also common. So, momentum trading entries should consider volume increments when assuming signals.
Ascending triangles: A triangle is a chart pattern that represents a further continuation and a possible breakout. In this case, an ascending triangle is formed by a horizontal trendline (resistance) and a rising trendline (dynamic support). If the price breaks through the resistance, a momentum signal emerges for the uptrend continuation. Otherwise, breaking through the dynamic support, a momentum signal emerges for the downside.
Technical Indicators Confirmation
Relative Strength Index (RSI): Traders can use RSI to gauge strong momentum in a trend and spot oversold or overbought conditions. The RSI, in combination with price action, can confirm an entry and an exit signal. For example, a bullish engulfing pattern while the RSI is in its oversold (30) level reinforces the signal, and if, after the entry, the indicator line points up continuously, it strengthens the uptrend momentum. Otherwise, the RSI failing to follow the price could be a signal for an exit.
Moving Averages Convergence Divergence (MACD): In the first instance, MACD is one of the best indicators for detecting momentum. It works on the base of line crossovers (when the MACD line crosses the signal line). For example, during an ascending triangle, a cross of the MACD line above the signal line while the price is heading to the resistance of the triangle suggests an upcoming momentum in favor of the trend, and if, after breaking out the triangle, the MACD points to the upward direction it strengthens the trend momentum. Otherwise, failing to follow the price could suggest a false breakout.
Surging price and MACD crossover. 1H chart.
Crafting a trading plan
Now, how can traders set entry confirmations and exit targets? Let's build a table trying to point out some clearer suggestions.
SIGNAL | ENTRY | EXIT |
|---|---|---|
Engulfing candlestick for the | Place a trade when: 1. RSI is below 30 2. MACD Crossover | Exit when: 1. RSI is above 70 2. MACD Crossover
|
Descending triangle | Place a trade when: 3. Price breaks out the horizontal support 4. Volume increase | Exit when: 3. Price has gone 4. Volume decrease |
Conclusion and Call to Action
Through this article, we have explored the possible variant signals for entering and exiting a trade applying the momentum trading strategy. Momentum strategies have demonstrated the versatility of its concepts to spot multiple signals while combining price action and technical indicators.
Traders can evaluate entries and exits from the viewpoints of engulfing patterns, triangle formation, or breakouts, and confirm those signals with RSI or MACD indicators.
Give this strategy a try by signing up for a free trial in Altrady and start paper trading momentum in crypto markets along with a wide range of technical indicators.
Catalin is the co-founder of Altrady. With a background in Marketing, Business Development & Software Development. With more than 15 years of experience working in Startups or large corporations.