Trading with Focus – Momentum. Nothing else matters
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A rocket doesn’t go straight up and then straight down, it will slow down before it starts to fall.
School didn’t teach me about momentum, where apparently p = mv, as I slept through remedial physics. How did they choose ‘p’ to mean Momentum, when ‘m’ stands for Mass and ‘v’ is for Velocity? Well, school didn’t teach me Latin either, but I can guess that’s probably where ‘p’ came from (when something doesn’t make sense, it’s usually Latin’s fault).
Let’s face it, school didn’t teach me much about investing at all, and neither did a business degree, which seems like the sort of degree in which I should have learnt such things. Someone should do something about that in this post-GME world…
Now I’m not about to claim that I learned how to momentum trade by playing Rocket League, but there should always be a learning moment in everything you do.
So, playing video game soccer with remote controlled cars, flipping and crashing around in a cage that is somewhere between an MMA Octagon and a soccer pitch — a perfect training ground for market psychology!
The more bits of boost that you collect in Rocket League, the faster you go — right up to the point of flying. But when you run out of boost, your momentum fades, then you fall from the air and some 14-year-old kid says unrepeatable things to you about your abilities and parentage.
Even in video games, I can find a good analogy for trading. If your stock is flying and doesn’t get regular boosts, there is a very good chance it will lose momentum. And it would be the holy grail to know that it’s about to fall, before it falls. Wouldn’t it?
You need the continual ‘weight of money’ coming in, taking out the sellers, the ‘Tesla buying a couple of billion dollars worth of bitcoin’ kind of mass, not the gentle breeze generated by ‘a bunch of spotty kids trying to move silver prices on a chatroom’. Otherwise you will lose momentum, even while the stock is still going up. Then, splat.
What about knowing when to enter a trade before the momentum starts to rebuild, after a pause, like a second rocket booster on some sort of space shuttle type thing? Would that be cool? Knowing when to enter, and then exit a trade… for money?
Well, like any technical trading indicator, momentum indicators should be something you understand, and consult. But you also need to remember, they are not the holy grail.
They are however a very good mathematical representation of the human component to trading, as they can indicate whether a sell-off or a rally is ‘petering out’.
According to Wikipedia, this little fella is “a momentum indicator that uses support and resistance levels”, was invented by a guy called “George” in the 50s, and “attempts to predict price turning points by comparing the closing price of a security to its price range.”
Also, “the signal to act is when there is a divergence-convergence, in an extreme area, with a crossover on the right-hand side, of a cycle bottom. As plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line.”
What. Does. That. Even. Mean? Let’s go through it.
Start with Divergence — that is where the indicator and the share price are going in opposite directions. So perhaps the indicator is showing that the rocket’s momentum is slowing, even if the rocket is still going up. Convergence just means they are coming together. So in this case, it’s talking about the two Stoch-O’s lines crossing over.
Ok, let’s make it simpler, using everyone’s favourite blue chip (speccy) technology (lender) company. The two boxes above show periods of accumulation, where seemingly the general market was unsure of whether it should go up or down.
At the end of each trading period, there was a breakout as it found a higher price after a period of sideways action, and for breakout traders this would be enough to go long. And rewarding! In this case…
The first box shows that the Stoch-O was building momentum before the breakout, so this was a confirmation that the breakout was ‘more’ assured, and if it was to believed, you would have entered at that first arrow or soon thereafter, or, waited for the break.
Then you should have drawn in your new support box. As long as it stayed within the supports you should have held because although the momentum was dropping off, the stock was going sideways, not down. In other words, there was still divergence.
You’ll notice the momentum then started to build again before the stock started going up. The momentum changed upwards before the stock direction changed, and so when the breakout occurred it had the ‘weight of money’ behind it.
The run from $100 to $150 is now history, with your $10,000 now worth $15,000.
There is so much to learn about the Stochastic Oscillator in order to spot trends before they happen for real, and a quick Google will help you understand it even better.
But it is also as simple as the clicking of a button on Marketech Focus, so go and start a free two-week trial at our website, where you only need to enter your email address – no grubby ‘free trial with a credit card’ shenanigans from us!
As you can see with the above Afterpay example, it worked very well as a confirmation to another technical indicator — in this case ‘the breakout’.
There are a few different types of technical indicators – trends, volatility, volume and momentum, all of which show different things and take a lot of noise out of the market’s day to day gyrations.
These indicators are often adjustable too, as they work on different stocks, in different environments, over different timeframes. Again, Google will help you understand the right settings, while Marketech makes it easy to do. On PC or mobile.
Once more for the record; we have 9 different chart types, 24 different technical overlays and a series of trendlines and drawing tools for you to become the best trader you can be.
I am usually one of those old-school clowns that use fundamentals first and technicals second, but we have it all, so the (proverbial) trading floor is yours.
And I’m still a rookie at Rocket League, so tell your kids to play nice…
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This article was developed in collaboration with Marketech Stockbroking Pty Ltd (AFSL 486148), a Stockhead advertiser at the time of publishing. This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.