SaigonFX's Daily Short-term Momentum Strength Scores

Trading Systems
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This is a thread where I plan to invite you into my home forex workshop, following with me one of the most important elements in my trading system: momentum analysis on the 15M to the Daily chart.

Each day during the Asia session, I look for significant momentum divergences on the 15M charts of all 28 major currency pairs. From this analysis, I give each pair a “strength score” on a scale of 0 to 7. If a pair is showing bullish divergences against all its competitors at the 15M chart level, its strength score is 7. If it doesn’t show any bullish divergences against any competing currency, its strength score is zero. There’s more to my daily analysis than that, but let’s keep it simple for now.

If a pair looks strongly bullish or bearish at the 15M chart level, I will then scan the higher time frame charts to see if that bias (bullish or bearish) is confirmed there. In this thread, I will let you know when a pair is consistently bullish or bearish across multiple time frames. These situations are often good trading opportunities and if one arises, I will let you know where I’ve fixed my stop, limit, and entry point.

What does a strength score mean? It means that if the score is 6 or 7, that currency is likely to broadly increase in value over the next 3 days against other currencies, especially those with a score of 0 or 1. Conversely, if a currency’s score is 0 or 1, it is likely to broadly depreciate in value over the next 3 days against other currencies. I must emphasize that momentum readings taken on the 15M chart usually take about 24 hours to turn in the predicted direction. Meaning, if today EUR has a strength score of 7, it may well continue to decrease in value over the next 24 hours before turning sharply higher. The “24-hour delay effect” is something I’ve noticed over a period of years with this indicator. Taking the analysis down to the level of the 5-minute chart would allow one to more accurately predict when a trend change will take place.

I’m glad to field any questions you may have about this momentum analysis method and how it plays into my overall trading strategy.

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OK, here are my short-term strength scores for July 17, 2012 (taken at 2:00 GMT):

USD – 7
CAD – 5
EUR – 3
AUD – 2
CHF – 2
JPY – 1
NZD – 1
GBP -0

Therefore, I’m expecting the GBPUSD pair to decline in value over the next 3 days. However, I only expect a brief decline (to around 1.5520, give or take 40 pips) because the momentum readings at the higher time frames are bullish, not bearish as in today’s short-term snapshot.

I’m also expecting USDJPY to turn up over the next 3 days and NZDUSD to turn down. However, neither of these pairs fit my strict criteria for actually entering a trade (I stick to only the highest-probability setups).

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Dear Saigonfx,

Thank you for sharing the idea. But do you are any indicators for your trading idea. Looking at 28 pairs of currencies on M15 Charts is a tough job for most traders.

Thanks for your sharings. I love your trading idea, but how can individual trader apply it without depending on you ?

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I’m glad to know you’re following the momentum readings with me Siewhf.

Once you get used to the process, each chart only takes about 30 seconds to analyze, so the whole process of looking at 28 charts takes about 15 minutes. The more time-consuming part of the process for me is on the weekends, when I perform a similar kind of analysis on the longer-term charts (30M, 1H, 2H, 4H, 8H, Daily, Weekly, Monthly). Totally that is about 250 charts so it takes me about 2 hours. But I’m in this market to make money, so I figure there is no room for laziness.

I am currently writing up a PDF document with lots of examples showing how I identify momentum divergences and deal with various kinds of cases one sees in real-world charts. I’ll post a link to that document here or (if it’s possible to do so) attach it to a post in this thread. I certainly hope any trader who wishes to do so will be able to apply this method without my help ;).

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Dear Saigonfx,

I am sure that your trading approach should be working well, as I am looking for such strategy approach.

Looking forward to learn more from you, and probably we can share and discuss more in the near future.

Thanks and have a great day ahead…

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Saigonfx,
Looking forward to the PDF and your charts. :slight_smile:

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Here are the short-term momentum strength scores for July 18, 2012 as of 00:30 GMT:

USD - 7
JPY - 6
CAD - 5
CHF - 3
EUR - 2
NZD - 2
GBP - 1
AUD - 0

Therefore, I am looking for the following tendencies in market action over the next 3 days:

AUDUSD down
GBPUSD down
GBPJPY down
AUDJPY down

In contrast to yesterday’s analysis, which showed cable making a countertrend move to the downside (we hit 1.5553, which was just inside my target range of 1.5520 +/- 40 pips), the momentum readings on AUDUSD are consistently bearish over multiple time frames all the way out to the 8-hour chart. When this occurs, the market almost always changes trend and reverses at least 2% in terms of nominal price. In AUDUSD, that means we are preparing to make a 100% retracement of the rally from the July 12 low.

Elliott wave analysis suggests this pair is ready for a big decline to below .9700, but that it could move as high as 1.0491 before doing so. This requires a few charts to illustrate, so I will make that case in a separate post. Should price travel higher towards the 1.0500 handle, I would view those as opportunities to conservatively add leverage and improve one’s net shorting position. The key to making such a strategy work is to begin with only a very modest short (I start with 20% of the risk capital I allow for a single trade, so if I’m willing to risk 2% of my equity on one trade, I would start today by betting only 0.4% of my equity on this AUDUSD short).

The bottom line is this: Under my trading system and rules, AUDUSD is presenting a tradeable high today. Here are my trade specs:

Selling AUDUSD at current price of 1.0317 (risking 0.4% of my equity)
Stop: 1.0510
Limit: 1.0110

Should price get to 1.0376, I will add a further short in which I risk an additional 0.6% of my equity.

Should price get to 1.0435, I will add a further short in whicih I risk an additional 1% of my equity.

Total possible equity risked in the entire trade setup is 2%.

Note that risk/reward ratio starts at 1:1 but goes higher should price move higher.

Will post a chart of trade setup shortly.

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Here is my trade setup today on AUDUSD:

audusd july18 trade setup.jpg700×308 35 KB

I’ll post a link to my Elliott Wave analysis on this pair shortly.

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Very insightful analyses! Good job…

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The Elliott Wave charts explaining the rationale for today’s AUDUSD short are now available at 301 Moved Permanently.

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SaigonFx,

Can you tell me how do you decide which currencies are competing currencies.

Also, I assume that you are using a momentum indicator. Can you share it?

"Here are the short-term momentum strength scores for July 18, 2012 as of 00:30 GMT:

USD - 7
JPY - 6
CAD - 5
CHF - 3
EUR - 2
NZD - 2
GBP - 1
AUD - 0"

Your system looks very interesting. Are you giving more information on the mechanics? I hope you do. :confused:

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I use MACD for momentum readings, though you could also use RSI. I use the standard MACD settings (12, 26, 9).

Each currency of the major 8 (USD, JPY, NZD, AUD, CAD, GBP, EUR, CHF) competes against the other 7 in the same group. Therefore each currency has 7 competitors in my system. I suppose one could adapt this system to work with some of the exotic currencies like NOK or ZAR but I just don’t trade those currencies due to the high spreads and lack of a complete set of crossrates for them.

I will be posting a PDF here illustrating how I use momentum, but basically I am just looking for standard (or “Type I”) momentum divergences, meaning, situations where price is making higher highs and higher lows but momentum is making lower highs and lower lows, or alternatively, situations where price is trending lower and momentum is trending higher.

I do not attempt to identify things like signal line crossovers or center line crossovers using MACD.

I anticipate having the PDF up by August - it will give lots of examples and show how to deal with the messy reality of real-life charts. I hope that document will allow anyone who wants to, to be able to do this at home.

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SaigonFx,
Thank you for your answer.
Here is my next question. Since forex comes in pairs how do you come up on the strength of a single currency . Is it by comparing each pair that contains that currency? Can you post some charts and examples?
Thanks you for your time

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The trade with aud/usd is still on?

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Here are the daily momentum strength scores for July 20, 2012 as of 2:30 a.m. GMT:

(Please note all scores are out of a possible [B]seven[/B] points)

USD – 5
CHF – 4
EUR – 3
GBP – 3
JPY – 2
CAD – 1
NZD – 1
AUD – 0

The main thing to take away from today’s results is not so much the idea of USD strength (while it had the highest total, the USD turned up neutral against the EUR and GBP and looks particularly vulnerable against those currencies), but the continuing signal of AUD weakness. All week long, the AUD has been signaling that a trend change is imminent and when it occurs, I expect the retracement to be deep and at times very rapid.

Nonetheless, the AUDUSD’s ability to climb higher in the face of waning momentum has been impressive and, as I mentioned yesterday, this pair might be aiming for Fibonacci resistance at 1.0491. I took advantage of the higher price to add to my short position (according to the entry levels mentioned yesterday) which now stands at 1.0347 net.

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Here are the daily momentum strength scores for July 20, 2012 as of 4:00 GMT:

USD – 6
EUR – 5
CHF – 5
GBP – 2
CAD – 2
JPY – 1
NZD – 1
AUD – 0

Overall, this looks like a heavily polarized market which is likely to produce big moves over the next 2 to 3 trading days. Once again, the most polarized pair is AUDUSD, suggesting to me that the short trade I entered on this pair will turn out all right if I just allow price to take its course.

My entry strategy included 3 entry points staggered about 55 pips apart. As price has risen, my second and third entries have been triggered, giving me a net short position at 1.0391. Price is getting close to my stop, but I expect the advance to stop before the Fibonacci resistance just shy of 1.0500 is reached.

More broadly, it looks like the USD has been slowly but steadily gaining steam this week for a sustained period of strength while the AUD is approaching overbought levels and should lead the decliners down over the next week.

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Here are the short-term momentum strength scores for July 23, 2012 taken at 3:00 GMT:

CHF - 6
EUR - 6
JPY - 5
GBP - 3
CAD - 3
USD - 2
NZD - 1
AUD - 0

The message I take away from today’s action is that momentum is telling me to look for sustained downward movement in AUDCHF. This is a pair that has generated three previous sell signals in the month of July, however, and I’ve been stopped out twice during AUDCHF’s seemingly relentless climb higher. As yunny, MontyJB, and others have mentioned over at 301 Moved Permanently, however, there are strong fundamental forces that make shorting this pair a risky proposition.

I report these momentum scores as raw data and for me, they must be taken into consideration alongside other technical factors such as wave structure. I can see a bearish wave count for AUDCHF but until USDCHF reaches a near-term high (a pair I’m following at 301 Moved Permanently), I would like to sit on today’s momentum readings and see how price and momentum change in this pair over the next day.

Similar to the situation in AUDCHF, today’s momentum data also suggest EURAUD may also be preparing to turn higher, but this is a pair that has been locked in a relentless downtrend and I’d like to see a firm short-term bottom in EURUSD before considering a trade in EURAUD.

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Here are the short-term momentum strength scores for July 24, 2012 as of 3:45 GMT:

(Please remember all scores are out of a possible 7 points)

NZD - 5
EUR - 3
CHF - 3
AUD - 3
GBP - 3
CAD - 2
USD - 1
JPY - 0

Today’s quick glance at short-term momentum suggests a muddled market for today, with the AUD correcting higher and the CHF losing some of the strength it showed (especially against GBP, AUD and CHF) yesterday. However, I expect the bearish trend in AUD and the bullish trend in CHF to continue by Wednesday.

Our most polarized pair for today is NZDJPY, which I am expecting to head higher to at least 62.21 over the next 24 hours. However, I don’t see NZD strength or JPY weakness at the higher time frames and so I am not looking at this as a trading opportunity.

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I now believe that USDCHF has little further room to travel to the upside, having hit my target range of .9920-.9976 and, I can see a clear five waves down in AUDCHF on the 15-minute chart. I would therefore consider yesterday’s sell signal on AUDCHF to be operational at the current price of 1.0200. My target is .9950. Stop: 1.0310.

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Hi,
This looks so interesting, hope you explain more!
Thank you!