Follow the trendDefine the trend, then trade with it.
The momentum system rests on one principle: trade with the trend. It replaces subjective trend lines with fixed EMA settings, and uses the ATR to check whether a trend has enough momentum to trade.
Why trade with the trend
The simplest principle in trading is also one of the hardest to stick to: follow the trend. After more than a decade of trading, the mentors found that most of their results came from trending markets. When a market was clearly rising or falling, they did not chase trend reversals or try to trade through messy sideways stretches. They lined up with the direction and rode it.
The momentum system, the first of 2 rule-based systems in this part of the course, is built on that experience. It only looks for trades in the direction a market is already moving, and only when that move has strength behind it.
What the research says
There is research behind the idea too. In 1993, Jegadeesh and Titman documented that assets which had done well in the recent past tended to keep doing well for a while, and those that had done poorly tended to keep lagging. Later studies, such as Moskowitz, Ooi and Pedersen in 2012, extended the finding: once a trend is established, it often persists for a while.
Part of the explanation is human behaviour. People follow the crowd, they react to news slowly, and new information is absorbed gradually instead of all at once, which is the pattern trend-following strategies are built on.
Keep in mind what research like this describes: a tendency across many markets and many years. It says nothing about your next trade, which is why the system still needs strict entry rules, a stop and a target.
The hard part: defining the trend
Following the trend sounds easy until you have to say exactly what the trend is. Trend lines are too subjective: 2 traders draw them in 2 different places. Market structure, the pattern of higher highs and higher lows, is more objective and works better, but it still leaves room for interpretation, and that leads to inconsistent decisions.
So the momentum system uses 2 tools that give everyone the same answer. Exponential moving averages, or EMAs, are average prices that react faster to recent moves, and they define the trend. The average true range, or ATR, measures how much price normally moves in a period, and it checks whether there is enough momentum behind the trend to justify a trade.
The settings
The settings are fixed. A 21 EMA and a 100 EMA, both on the 4-hour timeframe. A 200 EMA on the daily timeframe. And a 14-period ATR on the 6-hour timeframe, roughly the average range of a 6-hour candle over the last 14 candles.
Everything else happens on the 1-hour chart. You set each indicator’s own timeframe in its settings, so all 4 show on your 1-hour chart, and the checks and the trigger need no switching between timeframes. The aim is to take out the guesswork: clear rules, the same steps every time and fewer emotional decisions.
| Tool | Timeframe | Job |
|---|---|---|
| 21 EMA | 4-hour | Fast line for the momentum check |
| 100 EMA | 4-hour | Slow line for the momentum check |
| 200 EMA | Daily | Defines the main trend |
| ATR, 14 periods | 6-hour | Measures how much price normally moves |
| Your chart | 1-hour | Entry area and trigger |
The system in 5 steps
The settings feed 5 steps, which the next 3 lessons cover in detail: the trend, the momentum, the entry area, the trigger and the exits. Steps 1 and 2 decide whether a market is worth trading at all. Steps 3 and 4 decide where and when you get in. Step 5 fixes where you get out, before you enter.
Each step has to pass before you move to the next, and if one fails, there is no trade. The lesson on stops, targets and rules puts every step and rule of the system in one table.
Mistakes to avoid
- Drawing your own trend lines on top of the system. 2 traders get 2 answers, and the rules lose their point.
- Changing the settings or the timeframes. The checks only mean something if you run them the same way every time.
In short
- The momentum system trades only with the trend, because most of the mentors’ results came from trending markets and research shows established trends tend to persist for a while.
- Trend lines and market structure leave room for interpretation, so the system uses EMAs to define the trend and the ATR to measure its strength.
- The settings are fixed: 21 and 100 EMA on the 4-hour, 200 EMA on the daily and a 14-period ATR on the 6-hour, with everything traded on the 1-hour chart.
Questions
My platform has no 6-hour timeframe for the ATR. What now?
Add 6 hours as a custom interval in your charting platform and save it to your favourites. You can then select it in the ATR settings.
Key terms
- Trend
- A market that makes higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend).
- EMA (exponential moving average)
- A moving average that gives more weight to recent prices. A 21 EMA follows price closely, a 100 or 200 EMA shows the bigger trend.
- ATR (average true range)
- The average size of a price bar over a period, usually 14 bars. A simple way to measure how much a market normally moves.
- Market structure
- The pattern of highs and lows on the chart. It tells you whether a market trends or ranges, and where the key levels are.