ATR Momentum Breakout Forex Trading Strategy

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ATR Momentum Breakout Forex Trading Strategy

One of the easiest ways to earn from forex is by trading momentum. In fact, there are traders who can turn a few hundred dollars into a few hundred thousand dollars just by trading momentum trade setups. Momentum trading strategies work and they could bring in the money.

The reason many traders are unable to trade on momentum is because of the fear of chasing price and rightfully so. There are some instances when candles that seem to show good momentum would immediately reverse on the next candle. However, there are also many instances wherein momentum trades would result in a sudden expansion phase or a trend. Traders who were able to enter the market as the momentum started would be happy that they did so. These trades often bring in huge gains in just a short while.

The key to profiting when trading momentum setups is in identifying the right momentum candle. This is because many traders would just eye ball a candle and decide haphazardly whether the candle is worth taking or not. Often, greed would cause them to take a trade on a candle that does not seem to have a strong momentum behind it. Others would carelessly trade momentum strategies on a market with low volatility wherein candles are misrepresented due to the low volatility range.

The ATR Momentum Breakout Forex Trading Strategy is a systematic method of trading momentum with less guess work. It provides clear cut trade setups based on rules allowing traders to filter out low probability momentum candles.

ATR Channels

The Average True Range (ATR) is one of the best indicators used to determine volatility. In fact, the ATR itself is a measure of volatility. This is because the ATR measures the average range of a candle. High volatility market conditions typically have candles with larger ranges while low volatility market conditions usually have lower ATRs.

The ATR Channels indicator is a type of channel or band indicator which is based on the ATR. It draws a moving average line in the middle. The lines that flank the moving average are plotted based on a multiplier of the ATR.

The ATR Channels could be used to determine overbought or oversold conditions. Prices which are beyond the outer lines could be considered either overbought or oversold.

However, the ATR Channels is also great for identifying momentum. Candles typically stay closer to the middle line. Candles that close nearer to the outer lines typically indicate momentum.

AVQ Trend

The AVQ Trend is custom momentum indicator based on the Average Directional Movement Index (ADX).

This indicator is great at identifying short-term trends and momentum. It is very responsive and could quickly identify short-term trend reversals.

It overlays lines over the candlesticks to indicate trend direction. For this setup, the indicator overlays magenta lines over the candles whenever it identifies a bullish short-term trend, and yellow lines whenever it identifies a bearish short-term trend.

Trading Strategy

This strategy is a momentum strategy which is based on the ATR Channels.

Candles with strong momentum and have broken out of a contraction phase would typically close further away from the midline. Candles that close beyond the green line of the ATR Channels indicator would confirm such momentum breakout. It is these types of candles that signal a viable entry.

The short-term trend or momentum is then confirmed by the AVQ Trend lines.

The candles breakout from the ATR Channels green lines and the AVQ Trend lines short-term trend indication should confirm each other.

Indicators:

  • ADXdon
    • Mult_Factor1: 1.0
    • Mult_Factor2: 2.0
    • Mult_Factor3: 3.0
  • AVQ_trend (default setting)

Preferred Time Frames: 15-minute, 30-minute and 1-hour charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York session

Buy Trade Setup

Entry

  • Price should close above the upper green line of the ATR Channels indicator indicating a possible bullish momentum breakout candle.
  • The AVQ Trend indicator should overlay a magenta line on the candlesticks indicating a bullish short-term trend.
  • These bullish indications should be closely aligned.
  • Enter a buy order on the confirmation of the conditions above.

Stop Loss

  • Set the stop loss a little below the upper orange line of the ATR Channels indicator.

Exit

  • Close the trade as soon as a candle closes below the upper orange line of the ATR Channels indicator.
  • Close the trade as soon as the AVQ Trend indicator overlays a yellow line on a candle.

ATR Momentum Breakout Forex Trading Strategy

ATR Momentum Breakout Forex Trading Strategy2

Sell Trade Setup

Entry

  • Price should close below the lower green line of the ATR Channels indicator indicating a possible bearish momentum breakout candle.
  • The AVQ Trend indicator should overlay a yellow line on the candlesticks indicating a bearish short-term trend.
  • These bearish indications should be closely aligned.
  • Enter a sell order on the confirmation of the conditions above.

Stop Loss

  • Set the stop loss a little above the lower orange line of the ATR Channels indicator.

Exit

  • Close the trade as soon as a candle closes above the lower orange line of the ATR Channels indicator.
  • Close the trade as soon as the AVQ Trend indicator overlays a magenta line on a candle.

ATR Momentum Breakout Forex Trading Strategy3

ATR Momentum Breakout Forex Trading Strategy4

Conclusion

This strategy is a good momentum-based strategy. Momentum strategies work. In fact, momentum candles would often result in a profitable trade. The key is identifying momentum breakouts. This strategy provides an objective way of identifying momentum breakouts.

Most trade signals produced by this strategy would result in high yields. This provides a relatively high reward-risk ratio.

There are also scenarios wherein the entry candle that closes beyond the green line of the ATR Channels indicator is not a long momentum candle. It is still a viable entry as long as price action is showing momentum.

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