For short term forex traders, momentum can be the most valuable information. Traders often spend a good amount of time in an effort to identify the momentum of the market to play within it. Momentum is simply defined as the change of price in a particular direction within a certain time period.
There is a belief that if the price continues to trend in a certain direction, it is likely to keep trending in that direction. The life of a trend and momentum varies as per the time frame the trader is looking at.
The market might be trending with high momentum in a 5-minute chart but it might be a sideways market on a daily chart. In this research daily timeframe has been used as it is the most widely watched by the traders and analysts.
Also Read: Why You Need an Objective Trading Strategy?
Although there are various complex ways to identify momentum, only simple 3-up days and 3-down days are covered in this article. In this article, I have tried to find out what would happen if you bought after 3-consecutive up days?
Would you make money on the fourth day? Or what would happen if you sold after 3-consecutive down days?
Would make money on the fourth day? And which currency pair gave a better result based on this strategy? Exchange rate history from January 2001 through mid-January 2019 has been included in the study.
Among the various major pairs studied, AUDUSD had the highest number of 3-consecutive up days during the review period and USDCAD had the least. But the study showed that only 52% of the trades would be successful if you had traded on this strategy.
On AUDUSD average pips rise on the fourth day was 39 pips while the average fall was -40 pips which means you would still lose even if the % of winning trades is higher. In short, AUDUSD had the better win to lose % compared to other pairs but average pips gain is not impressive enough to offset the average pips loss.
Hence buying AUDUSD after rising for three days expecting it to rise on the fourth day may not be a good idea.
EURUSD had the smallest win to lose ratio but the average win was better compared to average pips lost.
On 3-down days also AUDUSD was the best performer. Although the win to loss ratio was not impressive average pips gained was greater than average pips lost. Additionally, selling on the fourth day following 3-consecutive declining days, none of the pairs were able to produce positive win to lose ratio.
From the above study, it can be concluded that using 3-day consecutive rise or fall, to gauze the momentum, can be almost useless.