5-Minute Forex “Momo” Trade Setup

“Momo” play is traderspeak for a momentum trading strategy. It comes in different flavors. And the flavor of the day is Forex, topped with EMA and MACD.

Kathy Lien and Boris Schlossberg wrote about this 5-Minute Forex “Momo” trade setup on Investopedia. Both of them are well-known forex analysts and have published several trading books.

• Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves
• Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game

Trading Rules – 5-Minute Forex “Momo” Trade

Long Trade Setup

1. Price crosses above 20-period EMA
2. MACD is crossing from negative to positive or has crossed to positive not more than 5 bars ago
3. Go long 10 pips above 20-period EMA
4. Stop loss at last swing low

Short Trade Setup

1. Price crosses below 20-period EMA
2. MACD is crossing from positive to negative or has crossed to negative not more than 5 bars ago
3. Go short 10 pips below 20-period EMA
4. Stop loss at last swing high

5-Minute Forex “Momo” Trade Examples

Winning Trade – 6E Short Momo Trade

This is a 5-minute chart of 6E, the EUR/USD FX futures traded on CME. The examples by Kathy Lien and Boris Schlossberg used spot forex, but I prefer trading FX futures.

1. The market was rather dead until the 4-bar upthrust. However, the bullish move was short-lived as it ended with a shining Evening Star candlestick pattern.
2. After the Evening Star pattern, prices crossed below the EMA but the MACD histogram is still positive.
3. Finally, the MACD histogram moved into the negative region. We shorted 10 ticks below the EMA as shown by the red line. Prices went plunging down. A textbook example of a “momo” trade.

Losing Trade – 6J Long Momo Trade

This is the JPY/USD FX futures contract, 6J. Although this trade had the support of a bullish MACD divergence, it failed terribly.

1. The down trend bumped into a MACD bullish divergence, which seemed like a good time to consider a reversal.
2. Prices shot up quickly and crossed the EMA.
3. MACD turned positive and we entered 10 ticks above the EMA at the green line. However, after our long entry, prices reversed down and stopped us out for a loss of 23 ticks.

Review –  5-Minute Forex “Momo” Trade Setup

This 5-minute Forex “Momo” trade setup makes use of the concept of confluence. It requires the both the EMA and the MACD to point in the same direction to confirm the momentum.

Take note that the trading rules for this momo trade are very specific. It applies only to 5-minute time-frame on forex. This is especially true for the rule of entering 10 pips away from the EMA. If you intend to adapt this strategy for other time-frames or instruments (which is possible), you must also adjust the 10-pip figure according to how volatile is your trading time-frame.

I find that having both EMA and MACD aligned is useful for confirming market bias. However, it does not pinpoint trade entries accurately. This explains why the stop-loss for this trade setup further away.

Rather than entering 10 pips from the EMA, I prefer to use a pattern, like the Yum-Yum continuation pattern or the Hikkake pattern, for trade entry. In that case, we might be able to tighten our stops to just below the signal bar.

One last point to note is that this is a momentum trade and the trading wisdom of letting profits run is extremely relevant here. Trailing stops are appropriate. You can refer to Kathy Lien and Boris Schlossberg’s article for more trade management rules which our review excluded.

For another momentum trading strategy, refer to Alexander Elder’s Impulse System.