What is momentum trading? My 20+ years experience trading momentum

Momentum trading, also called “impulse trading,” is one of the oldest trading techniques. It can be rewarding and provide great asymmetrical trading opportunities. However, in today’s noisy markets, a trader needs to find certain trading conditions to make momentum trading work better.

In this article, I share some tips and my 20+ years of experience trading momentum more efficiently.

What is momentum trading?

Before we get started, let's define some key terms. In a nutshell, Momentum trading can be defined as “buying something at high prices to sell even higher” and vice versa for short selling. Momentum traders deal with fast-moving, explosive markets (or market conditions) or markets moving in an active trend within a price discovery market regime.

Understanding a price discovery regime

A price discovery regime is essentially a market state that is pushed out of equilibrium, and tries to establish a new fair price to do business. 

This might happen due to market-shifting news, the beginning of a new business cycle, or simply an inflow of new buyers (or sellers). Understanding a price discovery regime is a cornerstone for momentum traders.

Momentum trading can be done without supporting market conditions using pure technical analysis, but its performance might be questionable. After all, a more efficient path in normal market conditions is “to buy low” and “sell high,” not “buy high and sell back higher.”

Performance of momentum trading systems

The backtest of an average optimized mechanical momentum trading system is displayed below (I’ve done that test myself for my own trading purposes). This example describes ETHUSD (Donchian channel breakout) but can apply to other similar instruments.

In this example, the equity curve is pretty choppy, even though the system generates profit in the long run. The average percentage of profitable trades is 30%, which is fair for most trading instruments.

. Using a system like this with manual trading can be challenging and frustrating.In practice, filtering trades and refining the rules is essential for better results.

Equity curve of a momentum trading system for ETHUSD. Source: Proprietary research of author (displayed with Python visual tools)

Which markets are suitable for momentum traders?

Best markets for momentum trading

Momentum trading can be used with various instruments and markets, such as stocks and indices, currency pairs, cryptocurrencies, and commodities. However, fast-moving, volatile markets are better suited to momentum traders.

Gold and crude oil are the most popular commodity instruments for momentum trades. For currency pairs, the most active ones are the Japanese yen, the British pound, and the euro. 

Markets to avoid

It doesn’t make sense to trade the momentum of the Singapore dollar, for example (SGDUSD) or Norwegian Krona (NOKUSD), as these markets are usually slow. It also doesn’t make sense to trade the momentum for certain slow stocks, such as JNJ or MCD. NVDA or AMD stocks tend to do much better.

Market structure and preparation for momentum trading

Key rules for a good momentum trade

Let’s break down some basic but important rules to help you prepare for a good momentum trade. 

Remember that these are examples and not trading recommendations or rules set in stone. You need to do your research according to your preferred trading instruments and stick to situations that offer higher potential.

Tip 1 - Build the “value area”

You can use the 20 and 50 day moving averages to build the “value area”. These moving averages are not perfect but in many cases they display a fair price zone. For us momentum traders, the particular interest lies in situations when markets fall out of equilibrium.

We will also need the Average True Range (ATR) indicator (momentum indicator),  a tool that measures volatility. 

Rule: If the price movements accelerate from the value area and exceed three daily ATR values, we consider the market as transitioning to either overbought condition or a price discovery regime. In the former case it will quickly collapse to the value area. In the latter, it has a high chance of continuing in the direction of a trend.

Example: Below is a chart of USOIL (American light oil) from early 2025. The price movements had emerged from the value area for 4 dollars (more than 3 values of ATR), displaying strong momentum.

Overbought conditions often happen with highly volatile instruments, such as cryptocurrencies, usually excluding flagship assets.

If the regular liquid market (such as Crude oil, for example) takes off and surpasses the 3-ATR zone, this usually displays an important shift in the price action. If we spot a situation like this, we can focus on executing the trade.

Tip 2 - Define the consolidation area

Markets tend to lock in a consolidation for a while after the initial price discovery. More often than not, the consolidation is short-term and does not exceed 2-5 days.

There are numerous ways to spot the consolidation, but I use a rather simple one: I build the inclined trendline, connecting two points of reaction.

The Crude oil example shown above unfolds on the lower timeframe (30-minute chart) shown below. The price action locks in a widening formation, which is a classical  technical analysis chart pattern. Our trigger point for buying happens when the price crosses the upper line of this chart formation. Isn’t it too late or too high?

Well, that’s not perfect, but things always look readable in hindsight. In real trading, you’d need confirmation, and, moreover, a reasonable stop-loss level. That’s why it makes sense to place a trade at the exact moment of a breakout.

Tip 3 - Proper exit strategy

“Do one brave thing today, and then run like hell.” Jokes aside, momentum trading involves short stop-losses (which is a completely different topic), this is why you’d need to exit your position in time.

Exiting a position in time might be even more important than entering it.

A simple yet powerful technique is a measured move. You can project the height of a trading range to the entry point and roughly calculate the exit point with that, as shown on the chart below. No exit point is perfect, but this one may be adequate since you don’t need to observe your position for several more days, watching your equity moving back and forth. You will enter a trade at the most active phase of the market and exit before the market locks in a coil.

My favorite technical indicators for momentum trading

Over the years, I’ve tested and refined various momentum trading strategies using technical analysis, and I’ve found that three momentum indicators consistently help to identify strong trade opportunities. My favorites are Moving Averages and Average True Range (ATR), but I also recommend Parabolic SAR for additional confirmation. Here’s why:

Moving Averages (20-day & 50-day)

• Helps define the “value area,” showing where price equilibrium exists.
• Identifies trend direction—when the shorter MA crosses above the longer MA, it signals bullish momentum (upward trend)and vice versa for bearish momentum (downward trend).
• Smooths out price action and reduces noise in volatile markets, making trends clearer.

Average True Range (ATR)

• Measures market volatility, helping to gauge when momentum is truly accelerating.
• When the price moves beyond 3x ATR from the value area, it often indicates the start of a strong trend.
• Useful for setting stop-loss levels, ensuring risk is managed in fast-moving conditions.

Parabolic SAR

• Helps determine precise entry and exit points by tracking potential trend reversals.
• Provides an easy-to-read visual representation of momentum shifts using a trailing stop function.
• Works exceptionally well in trending markets but should be combined with other technical indicators to avoid false signals.

By using these three momentum indicators together, I can filter out weaker setups and focus on the highest probability trades. Momentum trading requires a combination of trend confirmation, volatility assessment, and proper risk management—these tools make that process more effective.

Pros and cons of momentum trading

Momentum trading can be highly rewarding, but it also comes with inherent risks. Understanding a momentum trading strategy's advantages and challenges is necessary for traders looking to maximize gains while managing potential downsides.

Pros of momentum trading

• High profit potential – Traders can capitalize on strong, fast-moving market trends.
• Works in various markets – Effective in stocks, forex, commodities, and crypto.
• Clear entry & exit signals – Technical indicators help define trade setups.
• Aligned with market psychology – Takes advantage of herd behavior in trending markets.

Cons of momentum trading

• High risk of reversals – Sudden market shifts can lead to quick losses.
• Requires constant monitoring – Needs active management to time trades effectively.
• Emotionally demanding – Fast-paced trading can be stressful and requires discipline.
• Higher transaction costs – Frequent trades can lead to increased fees and slippage.

Key takeaways

1. Momentum trading is an age-old strategy – It focuses on buying high to sell higher and selling low to buy back lower.
2. Price discovery is key – Understanding when a market is shifting out of equilibrium helps identify strong momentum opportunities.
3. Fast-moving markets work best – Stocks like NVDA and AMD, commodities like crude oil and gold, and active forex pairs are ideal for momentum trading.
4. Volatility is your friend – Using tools like the Average True Range (ATR) helps measure market volatility and spot breakouts.
5. Technical indicators improve trade decisions – Moving Averages, ATR, and Parabolic SAR help confirm price trends and entry/exit points.
6. Market structure matters – Identifying the value area and recognizing consolidation patterns enhances trade timing.
7. A solid exit strategy is critical – Using measured moves and setting stop-loss levels prevent unnecessary losses.
8. Momentum trading requires discipline – It demands constant market monitoring and a strong emotional mindset to handle rapid price movements.
9. There are risks involved – Reversals, high transaction costs, and emotional stress can impact profitability.

Final thoughts

Momentum trading is one of the few techniques that aligns so well with human psychology: we see the momentum—we follow it. You don’t need to fight your instincts (which might be the case for other techniques). That’s why, if done correctly, momentum trading may become quite a comfortable trading style, if we can speak about psychological comfort in trading at all.

I encourage you to do research on the instrument you trade and train on historical data or past price movements to gain a better understanding of this trading style. Ready to put momentum trading to the test? Try it risk-free on an Exness demo account and refine your momentum trading strategy before trading live.