SaigonFX's Daily Short-term Momentum Strength Scores

[saigonfx]

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.

[saigonfx]

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).

[siewhf]

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 ?

[saigonfx]

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 ?

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 .

[siewhf]

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...

[bcarbon]

Saigonfx,
Looking forward to the PDF and your charts.

[saigonfx]

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.

[saigonfx]

Here is my trade setup today on AUDUSD:



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

[FXSniPer1]

Very insightful analyses! Good job....

[saigonfx]

The Elliott Wave charts explaining the rationale for today's AUDUSD short are now available at Going short AUDUSD today; target: 1.0110.