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Momentum Cycles
| Neophytes quickly fall under the spell of fast moving
markets. However, trading momentum is far more difficult than
most participants admit. When the emotional crowd ignites sharp
price movement, greed clouds risk awareness. The inexperienced
trader reacts foolishly and chases positions just behind the big
volume, where odds of a reversal quickly increase.
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Prices rarely move in a straight line. As shocks destabilize a
market, counter force emerges to restrain price back toward its
stable state. An inevitable backward reaction follows each
forward impulse. Burning the fuel of the crowd's money, markets
seek equilibrium before proceeding with the next price thrust.
Unskilled traders fail to consider this cycle when
entering momentum trades. They blindly execute positions
with a common and dangerous strategy: market entries on
accelerating thrusts.
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| Lacking
trailing stops and effective risk management, both good
and bad positions bleed money as sharp countertrends
destroy profits. As these inevitable reactions wind
down, losses escalate as blind fear chooses the exact
turning point to finally get out.
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Consider both action and reaction when developing effective
momentum trades. This demands complex planning and detached
execution. One successful strategy requires trading opposite to
natural bias: entries on counter trend reactions and exits on
accelerating thrusts. This aligns positions to the underlying
trend but against the current crowd emotion. Entries into
accelerating momentum can also work when tight stops are placed
and the trader exits into further acceleration. This eliminates
risk associated with the inevitable pullback.
Choosing the wrong action-reaction trigger produces frustrating
results. Every trader knows the pain of executing a low risk
entry, riding a profitable trend, then losing everything on a
subsequent reaction. Avoid this experience using clearly defined
tactics to minimize emotional momentum trading. Supplement this
discipline with multi-trend technical analysis and
cross-verification to identify profitable swing-points and
locate natural escape routes.
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| Riding the Wave: Markets
inhale and exhale as dynamic trends evolve. Reaction
follows impulse as momentum seeks stability in
preparation for new price change. Smart traders read
this continuous cycle through the wave motion in bar
charts. |
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