Hello All, This week’s blog is a little technical and a little philosophical all at the same time so if it seems a bit strange then just imagine how it is inside my head. LOL. This week I want to talk about momentum. Momentum can come in many forms and this week I want to delve into two forms of momentum that both affect us as traders.

You see momentum can be seen by looking at the charts and practicing our technical analysis but it can also be thought of as the momentum of our trading path to success. One path is learnable and the other can be both problematic and exhilarating all at the same time.

Let’s start with the easier one, momentum on a stock chart. There are several items on a chart that can give us a clue as to whether the momentum of a particular equity is increasing or decreasing. The first thing that comes to mind would be the size of the candles. Typically, the larger the candle (mainly the body) of the candle the more participation during that session and thus more participation should equal more momentum. This is not necessarily true, to really see momentum what we need to see in that increased participation over a few sessions to give us context regarding the actual momentum. Take a look at the picture below for a view of increasing momentum.

You can see that the candles get bigger as they continue to drop, this is a classic sign of increasing momentum. There is another way to see increasing momentum and that is by seeing the space between pivots or pullbacks getting increasingly larger as the trend continues.

From the picture above, you can see that the momentum is falling because the distance between the peaks is decreasing. This is a classic example of slowing momentum. There are other ways to tell if something is losing momentum and that involves the use of indicators. Some momentum indicators can signal something call divergence, this is essentially an opposite movement to the movement of the trend one is looking at. For example, if the SPY is moving higher with a series of higher highs and higher lows but the indicator is putting in a series of lower highs and lower lows this can be a signal that momentum could be failing. This will be something that we can explore further in a future blog series.

The point of this is that if we can train ourselves to recognize momentum and act accordingly then we can use that as a tool in our technical analysis to give an indication of which path might be the right path for us and that moment. This takes practice to recognize these patterns but with diligence, it can become second nature.

The above is the technical path I spoke of at the outset but there is another path that is far more taxing and is much less tangible and that is the momentum of your trading success. If you have traded for any length of time then you have probably experienced some swings or ups and downs in your trading. There will be times of extreme highs and extreme lows in this world of trading that we choose to be in. The question begs what do we do when these moments of momentum present themselves? Also, how can we prepare for when the momentum changes? This is the philosophical part that I referred to at the outset of this week’s blog.

I have been trading for quite some time now and I have experienced very high momentum in my trading and some very low momentum as well and the emotions that come with that are very real and can be very scary. A lot of new traders get stuck thinking that either the good times will never end or the bad times will continue on forever as well. The reality is that both of these scenarios act much like a pendulum, they swing back and forth constantly and we need to understand and prepare our minds for both scenarios so that it doesn’t damage us psychologically enough to affect our trading in a negative way. So, what is the solution?

The best solution I have ever been given to this problem came from one of my mentors and he said “ride that bull until she bucks you off!” Yes, he was from Texas and definitely had a flair for the dramatic but he was not wrong. What he was really trying to say in his own redneck type of way was that we as traders need to press our advantage when things are going well and we need to shore up our defenses when things are going bad. That sounds easy, right? Wrong! Most folks do the exact opposite, when they get a beatdown they double down to try and recover what they lost and most of the time this ends in disaster!

The reality is that this comes down to one universal trading principle and that is position sizing. When things are going right it can be ok to press your advantage by stretching your position sizing up to your pain threshold but not beyond but when things turn south and they inevitably will then you need to pull back the position sizing and protect that capital so that you are ready for when the next momentum run comes along.

So you can see there are two paths of momentum, each one is very important and both must be mastered if one wishes for long term trading success.

In next week’s blog, we will go through some of the momentum indicators I spoke and see if we can’t begin to train our brains to recognize the increasing or decreasing of momentum which by our discussion today can only help further our trading cause.

Happy Trading All,

Coach Holmes