Getting Started with the Momentum System – In Depth
Trading the system Purely Mechanically vs. Using Discretion
In a perfect world you’d be able to trade every single alert from the software purely mechanically and not have to make any decisions or do any work other than just executing the trades.
Well guess what? You can do that and over the long-run it should work out just fine. However that doesn’t really take into account the true nature of the market. Underestimating the trickiness and day-to-day personality changes in the futures market can completely throw a new trader off balance before they even have a chance to find their sea legs. There is this idea that the market is orderly and cyclical and has some secret underlying “mathematical symmetry” which just has to be discovered and tapped into to be able to cash in big. Most traders have a hard time handling the day-to-day inconsistency of price action and it’s not just as cut and dry as trading a certain setup. All trading setups ever invented have a failure rate.
The best way to trade the Momentum System Alerts is to use a bit of discretion here and there – based on the market environment and what you see unfolding on the charts in real-time.
Shooting for Target 1
Sometimes it makes perfect sense to just shoot for Target 1. The system is calibrated so that T1 will get hit roughly 75% of the time.
The biggest drawback with this approach is that T1 is always going to be a closer to the Entry than the Initial Stop. So generally speaking it’s a bad risk / reward proposition. However with the high hit rate, it can work out great for individual trades. The main caveat is that you’ll need several winning trades to make up for a full stop-out. The best approach is to plan on shooting for both Targets initially, then occasionally make the decision to go ahead and take the profits at the first Target – based on what you see transpiring in the market at the time.
Remember, the initial stop often tightens up before Target 1 gets hit, as the price approaches it. So that’s improving the risk / reward ratio. But as we mention, the big points are scored when Target 2 gets hit and the system quants out over a long series of trades based on the fact that T2 will get hit on long-range days.
What are the Best Symbols to Trade?
The Momentum System was originally designed for ES way back before the Micro Contracts even existed. All the internal logic and calibrations were originally set based on the behavior of ES.
Some years later we decided to add NQ, YM and RTY because conceptually the system and strategy should work on anything – since it’s based on “law of nature” type rules (see the training video for more on that). However the behavior of each instrument differs and they each have different personalities. With at said, based on our data, ES and RTY are the best symbols to trade with the Momentum System. NQ trades more erratically and is better for Scalping. YM tends to track along with ES and has a high correlation. Some sessions the different indexes will all have similar Alerts and results and other days you will see lots of differences in the performance and even the direction in which Alerts triggered-in. For instance one session you might see an ES long alert hit both targets, while RTY gave a Short Alert and maybe it just hit Target 1.
I don’t want to jinx it, but RTY seems to be the best symbol for the Momentum System in 2023 overall.
We have one user that trades both the ES and RTY Momentum System each day to diversify and hedge his bets (using the Micro Contracts MES and M2K). It seems to be working well and is a viable strategy. While RTY seems to be outperforming since the new version of the Alert Software was released, past performance is no guarantee of future results. So there are days where both symbols perform great and other days where the gains from one provides a profitable day when the other symbol doesn’t do as well. Maybe RTY hit both Targets one session while ES got stopped-our or ended up with a breakeven day. If you are looking to trade multiple symbols, these are the ones I’d go with.
We have another user that has a daily goal and just trades RTY and shoots for Target 1. As I mentioned, it typically takes several hits of T1 to make up for a full stop-out, but since May of 2023 this strategy has been profitable. If you’re thinking about trying out the idea of just shooting for Target 1, we recommend that you stay pro-active with the initial stop and trailing stops. In other words, if you actively manage and tighten up your stops a little faster and more aggressively than the system, just going for T1 can be a viable strategy. Also there are plenty of opportunities to “capture a little extra” when price breaks through Target 1.
You definitely want to start off trading the Micro contracts at the beginning no matter your account size.
The Alert software runs off the full size Contract data, so you simply trade the Micros based on the alerts from the corresponding symbol.
Getting knocked-Out of a Trade by the Trailing stop move
Sometimes a trade gets knocked out by the trailing stop then goes on to hit T2. In theory you could choose to use a wider stop than the system if you see something on the chart, but keep in mind that protecting our position is one of the primary objectives, so in the long run we’re better off getting knocked-out of a trade after T1 gets hit than risking a losing trade. At times the trailing stop will get nicked ever so slightly and then the price will continue in the direction of the Alert we were in. No worries. Over a long series of trades everything will quant out. Meaning for all the times we get knocked-out and the trade ends up at T2, there will be other times it will work in our favor and get us out at breakeven or protect some gains.
The Trailing Stop starts moving more aggressively later in the session
On days where an active Alert has already surpassed Target 1, you will notice that in the afternoon session the Trailing Stop starts ratcheting and tightening up faster. You’ll typically see this on a trending day. If price gets past Target 2 the Trailing Stop continues to tighten faster and faster as the session wears on and we get closer to the 4:00 Eastern close. This is part of the logic that attempts to squeeze as much out of a “Runner” as possible. Note that the Momentum System goes offline at exactly 4:00 Eastern time even if there’s an open Alert, so you will want to close any open positions.
“Scalping using the Momentum System”
Sometimes a Momentum system alert is ideal for a quick scalp and the levels can be particularly useful even for scalping. Especially in certain market conditions where the market hasn’t been really trending much. As you know, Target 1 is an “easy to hit” target and the idea is we take some profits there. At times it’s perfectly ok to just take all the gains at T1. An example might be if the market happened to be extremely volatile one session and T1 was say 6+ points away. Generally speaking we want to try and shoot for T2 because it takes several T1 hits to make up for a full stop-out. Also the initial stop is a consideration if we’re just shooting for T1. We’d probably want to use a tighter initial stop than the opposite side of the range. But once an Alert is filled and a trade is underway we can always choose to go ahead and just sell at T1 and lock-in the gains there.
Another trick for scalping using the Momentum system is to wait for an Alert, then take a trade 1-tick past the Alert price looking for a quick couple point gain on the follow-through. When we get an Alert, price has already escaped the opening range and is beginning to show signs it wants to make a directional impulse move. Rather than wait for the 1-minute Entry Confirmation we can attempt to play that potential move for a small win. We would most likely want to use a tighter stop than the system initial stop, depending on the range.
Range Expansion and Contraction – and How the Ranges Affect Everything
The 5-minute ranges are one of the primary drivers that affect the system. This is why you want to follow the Alerts on a 5-minute chart. (The 1-minute chart / timeframe is only used for the purpose of taking an Entry on an Alert). The 5-minute timeframe “average range” is one of the main data points that will affect the distance to the stops and targets.
Just about everything in the Momentum system is based on the ATR’s and current ranges in the market from day to day. The market itself goes through phases where the ranges (low to high) are small and tight on a daily and intraday basis, and phases where it experiences “range expansion” (often mistakenly referred to as Volatility). During dull periods in the market – and during periods of consolidation – the daily ranges are typically small. This can last for a period of time, but inevitably the market will begin to experience “range expansion” at some point. Sometimes the ranges get incredibly wide, which we refer to as “extreme market conditions”. This is usually due to some sort of news events playing out. Like the environment around Brexit, the 2020 Election, the Pandemic sell-off, the start of the Russia / Ukraine war, looming Government Shutdown, or some random “crisis” that pops up from time to time.
When these type of events occur and the ranges suddenly expand drastically, the nature and behavior of the system changes too. The risk / reward increases substantially. For instance during some of these periods in the past, we’ve seen Target 1 at 20-30 ES points. There were extreme market conditions in the past where a typical full stop-out might be 25-30 points per contract and at the same time, if both Targets get hit it’s an 80 point gain. (One of the reasons we introduced the “max stop”). So the point is that the “current environment” has a lot to do with how the system is going to behave and it tends to evolve and change like the seasons. The good news is that “everything is dynamic”. Meaning that the system itself will adapt to any sort of market conditions. So you want to keep that in mind during dull periods and periods of extreme volatility. Which goes back to the idea of managing your expectations based on current market conditions. The system goes through periods where the market is relatively dull and it might seem like Alerts are getting stopped out more frequently, then we enter a period of range expansion and the Targets are getting hit like shooting fish in a barrel. Fast markets with lots of volume and activity tend to be the best conditions for the system.
Target 1 assumes the market participants that broke the price out of the range have enough fire-power to continue to push price at least to Target 1. That’s where the use of the word “Momentum” comes in. And that tends to occur more frequently in active markets. The follow-through after an Alert is received is totally dependent on the subsequent market action, but the system is calibrated for a 75% hit rate on Target 1.
A full stop out will get made up by the next Alert that hits Both Targets
Some days if you think the trailing stop is too tight – and you might get knocked out of a trade that’s likely to go on to hit T2, use a little wider stop. Remember the trailing stop can be aggressive at times and knock us out of a trade that goes on to make the move we were looking for. Mechanical stops are great but every so often tweaking your stop based on price action might make sense. Full stop-outs are the worst case scenario but often times the system will give an alert in the opposite direction that goes on to hit the Targets.
Understanding the 18 Point “Fixed Max Stop” and how it affects the system
Originally the system was designed so that the initial stop was always 1-tick past the opposite side of the range, which made sense for a lot of reasons. Of the Range is “normal” the initial stop will always start off 1-tick past the opposite side of the Trigger Range. However in past years we’ve experienced certain periods of extreme volatility where that would mean the system would give an alert where the initial stop might be 20-30 or more points, which just seemed way too wide. So after analyzing years worth of data we came up with the optimal “fixed max stop” of 18.00 ES points. As already mentioned, when the fixed max stop is in play you should consider just trading 1 contract or even skipping that day. So occasionally the 18 point max stop will mean we get knocked-out of an Alert that goes on to hit both Targets. In some cases you could choose to ignore the max stop and set your initial stop at the opposite side of the range, but over a long series of Alerts we think it makes sense to define the max risk on any one alert. 1 Micro contract with an 18 point stop-out is -$90.00 which seems reasonable.
When the market enters one of those periods of extreme volatility, as mentioned above, the Max Stop works in our favor because we are limiting the downside risk, but the upside is unlimited. In other words, in extremely volatile markets we could see the initial stop at 18 points while T1 is 15 points and T2 is 30 or more.
Here’s a trick you can use when the 18 point max stop is in play:
Once an Alert fills – instead of getting in at the Entry Confirmation price (which is often way past the alert price) look to take the Entry at the Alert price itself, then set your 18 point stop below the Alert price. The reason this can work to your advantage is because the volatility on day where the max stop is in play typically sees a lot of wide price swings and there’s a good change you can get a lot better fill than the system, which uses the 1-minute closing price bar past the alert price.
Pre-Market support and Overhead Resistance
Certain sessions it makes sense to take pre-market price action into account when deciding on whether to take the first early session Alert. You want to have the 5-minute chart up and note the highs and lows preceding the Cash Open to see if there’s an area of major support or overhead resistance. Sometimes this is important and other times it isn’t. That mostly has to do with whether an Alert will fire off right near one of those levels. In other words, if there’s clearly a big resistance level just overhead and we get a Long Alert right under that area, it might make sense to wait and see if price can push through that level. It’s not really something that comes into play very often or something you want to overthink on a daily basis. But occasionally there’s a significant “wall of resistance” or floor of support just a wee bit past where the system might look to take an entry, so it might be worth taking into consideration at times.
Don’t fret over a tick or two here and there.
We’ve seen sessions where the price comes within a couple ticks of T2 but never makes it. You might have had a 10-15 point gain at that point, but the trailing stop is still hanging way back. Then it looks like the momentum is beginning to fizzle and maybe the price starts reversing. Go head and lock in those gains instead of taking a “breakeven” on the trade – as the system has the potential to do in that situation.
Lots of times price moves about halfway between T1 and T2 but never quite makes it to T2. This is where it makes sense to use some discretion based on what you see on the charts and how the session is unfolding. Remember, if the price gets in between T1 and T2 but reverses and hits the Trailed Stop, you’re going to end up with a Breakeven trade. And in most cases (depending on the distance to T2) it’s likely there was a fairly significant point gain past T1. So if it looks like the market has stalled out and exhibits signs of reversing, it might make sense to just close the trade and take the profits and call it a day.
Another trick you can use is to tighten your Stop to T1 if there’s reasonable distance between where price is now to T1. In this case you’d be guaranteeing to score at least the number of points that T1 offers. This strategy is best used when the ATR’s and ranges are not too tight. In other words if the distances are say less than 5 points and it looks like price could easily pull back to T1 with normal price fluctuation, you might want to hang on for T2. But if you have a 8-10+ point gain and the price is sandwiched between T1 and T2 you might choose to “lock it in” or use a much tighter stop so you don’t give back much.
If the market looks dicey just skip the 1st alert of the day. The first Alert has the highest chance of hitting the full stop – especially on the Opening Drive, which is roughly the first 15-minutes of trading. Here’s the dilemma. If we avoid the first Alert, the price might just take off in one direction and never look back – hitting both Targets and we missed out. But frequently the market likes to make a head-fake move shortly after the cash open. This is when it moves in one direction for the first several 5-minute price bars, then reverses and makes a significant impulse move in the opposite direction. It’s difficult to quantify and program into the logic of the software, but there are times where you might “know it if you see it” and choose to just skip that first early Alert.