Momentum Trading In Commodity Futures Markets

October 6, 2009

Momentum traders are those who focus on commodities that are moving in one direction with a substantial increase in traded volumes with an aim to attain profits. Momentum traders, when trading the commodity markets or commodity options markets, can hold a trade anywhere from a few minutes to a few days. They will try to hold a trade till the momentum of the trend they are trying to ride lasts. They will square off the trade when the momentum for the commodity concerned fizzles out.

Momentum Day Trading

A good momentum trader would be up and awake early in the morning reading up on the news that may have affected existing trades, or new ones generated the previous day by his system. Momentum traders use online trading platforms more often as it gives them the power of speedy trading. These platforms also provide the latest market news and picks for the trading period. Commodities that have shown very large volume growth with an increase in momentum recently are ideal candidates for the next few trades. Business channels often blare out the latest commodity market updates live and traders gather as much information as they can to help them determine which trades they are going to take.

Momentum traders use charts regularly to determine trends and momentum picks.

Momentum Trading With Charts

A good momentum trader picks trades by using key indicators which usually includes the momentum indicator. This indicator analyzes actual total changes in a commodities closing price over a predefined amount of time while comparing its traded volumes. These are what will tell the trader whether he can shortlist the commodity or not. Once the trader has picked out the trades that match his criteria of being in momentum, the chart for the commodity is pulled up and analyzed. Here, re-confirmation of a trend and momentum are established in different timeframes for the same commodity. When a breakout is confirmed either up or down, then the order to buy or sell the commodity futures is placed. As soon as this order is executed, the disciplined momentum trader immediately places a stop order limiting his loss to a certain fixed amount, which is determined by his trading system.

If he is correct, the commodity will move in momentum, and breakout of its range. If it does so, and the trader keeps investing the money on this particular trade, he will maintain a keen eye on his technical indicators and oscillators for any exhaustion signals. As soon as he gets an exhaustion signal, or his target is reached, he will place an order to close the trade. While his trade moves in momentum, he will also move his stop up slowly to make sure he locks in some gains every time the trade responds in his favor. This is called a trailing stop. Of course, he will be stopped out if he is wrong.

Thus, a momentum trader essentially uses momentum indicators to trade possible breakouts in futures or futures options, which are showing momentum according to the trading system on the charts. However, to be a good momentum trader, discipline and hard work is necessary.


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