Momentum trading is defined by the current market stage. Essentially, a trader looks to capture the breakout or breakdown from consolidation or congestion — i.e., sideways price action that reflects the market’s uncertainty or anticipation, typically before high-impact economic data releases.
Traders and investors generally shy away from making large bets before such events — they are unwilling to step in front of the size and volatility. This anticipation of a large move keeps traders on the sidelines as they wait to see which way the report will move the market.
It’s precisely this psychology that creates potential momentum trade opportunities in front of announcements such as an FOMC interest-rate decision, the employment report, or the GDP number, to name a few.
Sideways markets can also develop during market doldrums. Much as the stock market often consolidates during lunch-time hours, the forex market has periods during which it is more likely to congest — specifically, after the London close until the Asian open. Momentum trade entries are best set up leading into and during the European and UK forex trading hours, and from the New York open at 8 a.m. ET until noon ET because these are the times when follow-through is generally best.
Knowing the overall direction of the market is the key to knowing when to set up a momentum trade because it is specifically the initial momentum the entry is looking to capture. Identifying opportunities in a sideways market can be accomplished a number of ways; one of the best is through chart pattern analysis.
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