MOMENTUM WEAKNESS

We should trade according to the main market momentum. In some cases, if we know how to recognize, then trading with weaker trend reversal momentum still helps us to have a good profit.


As shown above, the right is an uptrend with an up-and-rising flag pattern continuing the trend. Then there will be price re-auctions, and these re-auctions will give us an idea to join the trade.

A bounce with weak momentum will have a short reversal, a bounce deep one will go longer, and if it is very long there is a high chance of a reversal.

Typically, there are two common scenarios after the price has lost its momentum:
  • The price moves slowly, often forming a flag or wedge pattern. In these cases, traders who trade against the trend, or trade with the counter-trend momentum will want to exit their position because trend-following momentum can occur at any time.
  • Price has weak momentum and then turns in the same direction as the trend and this is the scenario a trader needs.
HOW TO RECOGNIZE SIGNALS

There are ways for traders to improve their odds of catching waves with weaker momentum:
  • Check if the previous momentum has gone against the trend or not. If so then it's an opportunity to trade in the opposite direction.
  • Use candlestick patterns to enter trades
  • Use oscillators to identify divergence signals or otherwise identify prices that are going overbought or oversold.
  • Identify nearby support and resistance areas that are strong enough and difficult to be broken by prices.
For Example:


On the previous trading day, the market had a momentum going against the trend, and in the end, the price dropped again because the downward momentum followed the trend back.

Another example, in this chart, GBPNZD has broken through the price channel. However, the break happened when the RSI was close to the oversold zone (red circle). So it is very likely that the price will return to the previous trend.


SUMMARY 

Taking advantage of the weaker momentum in a trend bounce combined with a candlestick pattern or an emerging price pattern will help you to follow the major market trend without missing too far from the previous bull or fall.

As the momentum of a rally weakens, which shows that the counter-trend traders are also showing weakness, they don't have the momentum to push prices any further. When they exit the command at the same time, it's time to enter.

Checking for overbought or divergence signals will help us confirm the market's momentum more clearly.