When it comes down to it trading is all about reading sentiment and capturing momentum how well we do at that is determined by how efficiently we do those two things.
And that in turn, is often driven by our psychology, which is why I have written quite a bit about that recently.
We can think of price momentum as being the physical manifestation of trader sentiment, simply because the momentum in an instrument shows how traders are voting, or positioning themselves, and their capital.
Think about it, if a stock of FX pair is rising rapidly and continuously in price then it stands to reason that demand is outstripping supply and that the bulls are in charge of the market.
And will remain so until we reach a new equilibrium price where buyers and sellers or supply and demand are equally matched, or to the point where the buying demand is exhausted, or if you prefer when momentum has run out of steam.
We can see examples of momentum(and exhaustion) in this chart of GBPUSD. Firstly, in the upside breakout on the 28th of April, which took us from 1.2457 all the way up to 1.2580 before failing at 12584.
Cable subsequently broke higher once more on May 3rd, having previously retraced its prior gains and more.
I have used an example of upside momentum here
But I could just as easily have used charts that capture downside momentum because momentum, and its visualisation of sentiment, or the degree of imbalance between buyers and sellers/supply and demand, applies in both directions. And indeed in the absence of sentiment when markets move sideways.
It's often said that in trading the trend is your friend that's especially true for those who are new to the markets and are looking for a straightforward and practical way to benefit from price action in the wider market.
After all, if you are a newbie or novice, or even a slightly more experienced trader are you really going to have the insight and understanding to allow you to outsmart thousands of other traders and make money?
The answer will almost certainly be no, and that is good news because you don’t need to be smarter than the market. You just need to follow it and stay with it until there is new information or the trend that you are following changes.
Sounds simple doesn’t it? And it genuinely is- yet so many retail traders choose not to follow trends but oppose them instead.
Let's take the example of graphics chip maker Nvidia (NVDA) which we’ve charted above over five days of 60-minute candles.
From the first green candle posted on the morning of April 27th, there is absolutely no reason to consider selling, or shorting Nvidia, until we saw the spinning top on the afternoon of May 1st.
The spinning top is a candle pattern that indicates indecision, and it tells us that neither the buyer or sellers are in control of the market. And that the market is searching for direction or impetus. When, we see such a candle during a strong trend, in this case, an uptrend, it's a pretty big clue that sentiment, and therefore momentum, could change direction.
However, we can't be certain of that, until we see a trend change.
And even then not until it's confirmed, which in this case happened with the second candle posted after the spinning top, containing as it did a lower high and a lower low.
We only need to look at the number of new highs that Nvdia has posted in 2023 (29 new highs YTD) to realise that shorting it, without waiting for a signal from the market, was a fool's errand.
However, you can be sure that plenty of retail traders will have tried to do so, and will have had their fingers badly burnt in the process.
In summary, then don't oppose the prevailing trend in the market just because you think it has run far enough or has got to change at some point.
Instead, let the sentiment of and the momentum created by the wider market (and the weight of money behind it) lead you.
Follow the prevailing trend until we get a signal that it's faltering.
At that point be ready to take your profits from the prior trend and be prepared to follow the new trend, once it's been confirmed.
If you can master this discipline then you will be on your way to trading success.
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