A look at various scenarios you’ll see play out using the Momentum System
As you know, the Momentum System doesn’t try to predict anything – it reacts to the markets price behavior as it unfolds in real time. Every market session is unique as far as how it unfolds, so I wanted to create this page to show how the system reacted to various conditions.
The chart examples below are mocked up in Think or Swim rather than NinjaTrader because ToS is a bit easier to work with as far as drawing the levels. Also, the NT8 indicator just shows the current levels in real-time and doesn’t provide the “whole picture” after an alert plays out. For instance, when Target 1 gets hit the line changes to display Target 2.
This first example is from 1/11/2024 and shows an alert that played out very quickly, hitting both targets within the first 40 minutes of the cash session. While the mark-ups on the chart should be pretty self-explanatory, there are a few interesting things to note.
The first thing to notice is that the Trigger Range was exactly 10.00 points, 4820.00 – 4830.00. It’s hard to define “normal market conditions” but a 10 point opening range is slightly wider than what we’d typically see on an average day – in periods of average volatility. But it’s interesting to see the distance to the Targets and the net result based on an exact ten point, opening 5-minute ATR.
By the way, the charts on this page will be 5-minute charts unless otherwise noted. The 5-minute chart is the preferred timeframe to follow along with the Momentum System once an Alert triggers-in. Also the blue moving average you’ll see on some of the charts is the 21-period EMA. The 21-ema on a 5-minute chart can be extremely useful as you’ll see in some of the examples on this page.
So as I mentioned, everything on the chart above should be pretty self-explanatory, but an interesting thing to note is the additional “downside traction” after Target 2 was hit. The low of the move was 4772.75 which was -40.50 points below the Short Entry. While this isn’t the best example of how you might capture additional points past T2, it does get us thinking about how we might take advantage of certain sessions where the price makes a significant move past the 2nd Target.
This next example shows what I’d consider to be extremely rare price action. The price never touched the 21-ema the entire cash session (even though it came very close within 2-ticks). I’ve seen plenty of sessions with strong directional trends where there’s no 5-minute close past the 21-ema, but I’d say what transpired here probably only happens a few times a year.
So there’s quite a lot we can glean from this example. And it should also get you thinking about how we might capitalize on a strongly trending day – beyond the simple strategy of trading 2 contracts and selling one at each of the 2 Targets.
Keep in mind that it’s nearly impossible to identify a strong trending day like this near the open, but the obvious way to catch the bulk of a move like this is to trade 3 (or more) contracts and look to take partial profits at the 2 Targets, then let the rest ride using the Trailing Stop. Every so often we see a strong move like this where the trailing stop never gets hit and you’d simply close out the remaining contract at the cash session close.
It’s easy to say in hindsight that one might have used the 21-ema to stay in this trade, but the reality is that a session like this is pretty much an anomaly. Price tends to touch and trend above and below the 21-ema multiple times during an average session. But I do think in certain circumstances the 21-ema can be used to enhance the returns for some alerts using a bit of discretion. The main thing I want to emphasize here is that it’s important to realize that in certain sessions, the price will blow past Target 2 and just keep going – so it’s possible to capture a lot more points than the “basic strategy” offers on strongly trending days.
Here’s an example that shows why trading around Holidays are not usually recommended, particularly the week between Christmas and New Year’s. In past years, our observation is that the last couple weeks of the year are just not conducive to trading overall. People are getting ready for the Holidays and doing other things. The volume and participation are low, which leads to choppy conditions and exaggerated, random price moves. It’s just not “normal market conditions”. We also see this same type of behavior around other Holidays – like a 3-day weekend.
You can see why I call this “choppy” price action. Notice the range is only 6.00 points which is at the low end of “normal”. Anything less than a 6-point Trigger range increases the likelihood that the price is going to cross above and below the Range multiple times. Also the smaller the Range, the less the distance to the Targets. So you can see it took the price over an hour to even poke out of the Range, which is highly unusual – especially for a mere 6-point range. You can see where the first Alert triggered-in and then price reversed and went down to hit the stop. There was another almost identical Alert later in the afternoon that I didn’t mark on the chart that did the exact same thing. Here are the System notes from that day:
One interesting thing to notice in the System Notes is how mid-day the system was firing off a series of both Long and Short Alerts that never triggered-in. It’s common to see an alert that doesn’t trigger-in, but to see a series of them like this (look at the time stamps) should have been a clear indication that the session just wasn’t conducive to trading that day.
If you look at the chart again and think about it – it would have been a great day to avoid that second alert. You’ll notice that the Alert fired off at 2:12 Eastern time and didn’t actually trigger in until 2:28 – which is exactly 2 minutes before the system would have just shut down for the session if there was no active Alert. So in order for a user to take that second alert they would have had to sit at the computer all day (when everyone else was in Holiday mode) and watch the price just chop up and down with no discernible trend – and then decide to trade that alert two minutes before the cut-off time. It’s just a great example of why we recommend “using some discretion” and avoiding certain alerts – particularly when you see this type of choppy price action – which frequently occurs around Holidays.
This next example has all sorts of interesting characteristics and we can learn a lot by reviewing what transpired. First of all, the Short Entry level is the actual “Entry Confirmation” where the alert triggered-in based off the 1-minute chart (even though this is a 5-minute chart). After the Entry there were two 5-minute price bars that came down and touched Target 1 to the tick. With a limit order at T1, it’s questionable whether the order would have been filled. Also keep in mind this is an ES chart and MES occasionally differs by a tick or two – so it’s possible that trading MES would have got a fill on either of those price bars. We’ve seen sessions where ES comes within a tick of one of the Targets or Stops but doesn’t hit it, where MES actually does. Just something to keep in mind.
So after Target 1 got hit, you can see where the price traded down to within 2 (lousy) ticks of Target 2, but never quite made it. Then price reversed and went all the way back up to tag the (ratcheted) Trailing stop – by just 2 (lousy) ticks – and knocked us out of the trade. Then it proceeded to drift back down and eventually hit Target 2 – after we were already out of the trade. Remember, in order to receive a new Alert, the price has to be inside the Range and break out. It was significantly below the Range when all this transpired, so there was no second alert that went on to hit T2.
It was simply a case where the trade got “thwarted” by weird price action. We see that frequently, but not usually in such an obnoxious way. It’s more common to see price get really close to Target 1 and the Trailing Stop ratchets – gets hit – then the price goes on to hit the Targets anyway.
But there’s something else to consider here. When the price got down there within a couple points of Target 2, it would have been perfectly reasonable to say “wow, I have a 15 point profit right now and I’m not sure it makes sense to give most of it back if the price were to reverse and trade all the way back up to the Trailing stop” (which it did). So think about watching this price action unfold between T1 and T2 and think about what would be going through your head over that 20 minute period. On the previous pages we talked about using a little “common sense discretion” here and there and in this case I would suggest either just saying “close enough” and taking the profit, or at least tightening the stop to the high a couple bars back or so. In other words, sometimes it makes sense to close a trade and take the profit even if the system doesn’t.
It seems a little odd that the Trailing Stop would be so far away from the price when it was almost at T2 – and it is an unusual case. Typically when price gets close to T2 the Trailed Stop would be between T1 and T2, but not always. The system reacts differently based on the levels, market structure and timing of the approach to the Targets. While the distance to the trailing stop in this case is unusual, it’s a good lesson in how a couple ticks can make a big difference. Notice the Trailing Stop got tagged by a just a couple ticks and then the price proceeded to go on to hit Target 2 before the end of the session.
Keep in mind I posted this example because it was such an extreme “anomaly”, but it demonstrates how crazy the price action can unfold in any given trading session. There are plenty of examples where price came within a tick or two of the Targets but didn’t make it all the way, so you might consider saying “close enough” on occasion – especially when significant points are involved.
The example below is a statistical anomaly that you might never see in any given year. It’s from a few years back and I don’t even remember what caused the volatility that day, but it clearly shows what I mean when I mention “extreme market conditions” in other places in this documentation. It’s also an example of how the “18 Point Max Stop” can come into play – and why trading on those days is extremely risky.
The first thing to notice is that the 5-minute opening range was 25.75 points, which you might see once in a Blue Moon. You could go an entire year or two and not see an opening range this wide. The ATR’s and ranges on the chart are so rare that the only time I remember seeing similar days was during the Pandemic sell-off of 2020 and when the Russia – Ukraine war started.
As you know, the ES / MES Momentum System incorporates an 18.00 point fixed max stop. If you do ever see the max stop come into play, we recommend either avoiding the session altogether or just trading 1 Micro contract. As you know, the initial stop always starts off 1-tick past the opposite side of the range (unless it’s over 18 points). So in theory the max stop thwarted this alert because you can see where the price poked down to hit the stop before making a gargantuan move that hit both targets (without ever touching the 21-ema). But we have to draw the line somewhere for a max stop and 18 points was the optimal level based on years of data.
There have been a few extremely volatile periods in past years where the max stop came into play frequently over a couple week period of time. Some sessions the trades work – and others hit the max stop. The thing to realize is that in “extreme market conditions” like this, Target 1 is typically in the vicinity of where Target 2 would be under normal conditions. In other words the distance to Target 1 in this case was 15.25 points – which is where you might see T2 on a more average day. It’s just something to keep in mind so you realize how drastically market conditions can vary. The market goes through dull periods and then eventually transitions to more volatile conditions. The Momentum System adapts to the current volatility in the market from day to day and it’s a good idea to take that into consideration. Extremely dull and extremely volatile conditions aren’t necessarily bad for the system, but it’s a good idea to take the current volatility into consideration. There have been plenty of Alerts that hit both Targets during conditions similar to the chart above.