Momentum trading is extremely profitable for multiple reasons. The main reason being that as a retail trader, following the trend in a herd of institutional money moving markets allows you to take high probability trades while limiting risk. Why go against the trend? It’s the equivalent of thinking that you alone can move a whale.
The reality of it, no matter how big you trade, 10, 20, even 30 lots; there are institutions that move hundreds and thousands of contracts in the futures market. Where else do you think the 2 million contracts on average come from in the S&P 500 futures market.
In the following article we will discuss our favorite momentum trading strategies when trading futures to help you become a profitable consistent trader. These simple strategies have helps countless traders at TRADEPRO Academy go full time while only trading 2 hours a day!
Before we get into the meat and potatoes of the strategies, we should discuss the premise of day trading futures.
Day trading and futures
Day trading involves taking a position throughout the day and closing it before the day ends. The glory of the futures market is that it bypasses the pattern day trading rule. In the US, you will need $25,000 in your brokerage account to day trade. Everything excluding futures.
In futures you can have a $1,000 account and still participate in the markets, without getting caught up in the pattern day trader rule.
This is irrelevant information for those traders outside of the US, where you can trade stocks and options with less than $25,000 on day trading basis.
The futures market is very lucrative and has substantial moves throughout the day to keep traders interested. What is a futures contract? The opportunity presents itself day in and day out. For more information on day trading futures, check out our ELITE package.
Best day trading hours
We mentioned before that all it takes is 2 hours of trading a day to reach that profit target. So which hours are best for day trading futures?
The best part of the futures markets is that they close for only 1 hour a day. Between 5:00 PM EST and 6:00 PM EST. Otherwise the futures markets are open throughout the whole day!
That does not mean that any 2 hours are the best hours to trade.
The best hours to trade are US futures are from the opening bell at 9:30 am EST or 9:00 am EST for oil to the European close at 11:30 am EST.
Within these two hours, excluding afternoon news events, a trader has the opportunity to make their daily profit target. This is when the most volume in a 2-hour span comes into the markets.
This is a because all of the big money from the US begins to trade, through institutions and other size movers. It comes from the US stock cash session open.
If you are unable to trade these hours, fear not, there is opportunity in the evening sessions as well.
When Asian comes to the desk at 9:00 PM EST and when Europe steps in at 3:00 AM EST.
Momentum day trading strategy
Let’s dive into the section you’re all looking for. The momentum day trading strategy. As mentioned before the momentum day trading strategy is the identification of the market trend and hoping on board. There are two strategies that a trader can use to get on board momentum.
The pullback strategy that we have talked about time and time again or the breakout strategy.
The breakout strategy is a little more difficult but very effective in a fast-moving market with little rotations to get onboard the side of momentum.
Momentum is the strength of the direction of the market. A market can have either bullish or bearish momentum.
Identifying the momentum is the first step. That can be done by the combination of market structure and volume to confirm the trend.
The asset that will be discussed today is the S&P 500 E-mini futures contract. This trading strategy can work with any futures asset! From equities to oil to precious metals such as gold.
First things first, we must identify the market structure. Is the market printing higher highs and higher lows (bull trend) or lower lows and lower highs (bear trend)? The last alternative is the market ranges. Is the volume high on the continuation of these trends?
Lets look at an example of the two, excluding the range.
In a bull trend, traders are looking for areas to get long the market as volume increases in the direction of the trend. This confirms momentum.
In the example below, we have highlighted the bull trend with the green horizontal rays.
The rays indicate the broken highs, presenting us with higher highs and higher lows.
Each time a high is broken, the price pulls back to that broken level. In one instance there was a break of the bull trend indicated with a red ellipse. The bull structure was temporarily broken and then continued.
In a bear trend, traders are looking for areas to get short the market as volume increases in the direction of the trend. This confirms momentums.
The image below represents the bear trend, lower lows and lower highs indicated with the red rays.
The trend was temporarily broken, indicated by the green ellipses. The trend then broke the bullish line in the sand and continued a new microstructure bear trend. Then price began to print lower lows and lower highs yet again.
Pullback on momentum
The pullback strategy is the simpler of the two. This is a staple at TRADEPRO Academy. Once a trader has identified the direction of the trend; they will look for a pullback into a broken area to get on board of the trend.
Below we have identified the bull trend and the potential long areas. What makes this a momentum trade?
The trend is clearly to the upside since the S&P 500 futures are printing higher highs and higher lows on strong volume. Meaning that the upside momentum is strong.
The trade idea begins when the previous top is broken at 2917, goes up to the 2920 level and retests the broken 2917 new support.
On the rotations at that support is a high probability long idea to get on the side of the trend. We have circled it with a green ellipse.
There is one more long possibility as price breaks the 2920 resistance, moves into the 2923 level and retests the new support at 2920.
The opportunity is again circled with a green ellipse.
Break out on momentum
The breakout strategy is a little riskier, however in the face of strong momentum can be a profitable trading strategy.
The breakout is used at the top or bottom of the structure, where you take the trade in anticipation of a break of strong support or resistance to flush the stops that are pinned to either side.
This is a fast paced traded for a fast-paced market. This doesn’t work too well in summer markets.
The breakout example is the same as the previous pullback example. The idea is the break of the previous peak higher after price fails at the 2922 level. When the price pulls back you can either pick up the rotations at 2920 support. Or with the strong momentum move to the upside on strong volume a trader can take a more aggressive long at the 2922 for the break higher through the resistance peak.
The first target would be the 2924 level where the 5-day POC is. This is a riskier trade to the upside considering it is a summer market. However, the strong move higher on strong volume is worth the potential risk.
Trades like these are more probable in volatile fast-moving markets. From September to June.
Favorite momentum day trading chart patterns
At TRADEPRO Academy, we have a favourite pattern when trading futures! It’s proved effective time and time again. We don’t mean it’s a sure thing, we mean that it’s a higher probability move!
Our favourite trading pattern involves first the identification of the momentum side, what is market structure telling us?
Are we in a bull structure or a bear structure? Then we look for the break of a level of resistance in a bull market or of support in a bear market.
In the example below, we identified the pull trend and what we want to see is peaks broken and the retest of those peaks. The peaks are identified by the sky-blue ellipses.
Spoiler alert our favorite chart pattern is the break and retest on rotations or double tops/bottoms.
Notice in the image example below when the sky-blue levels hold resistance, we drew a horizontal green ray for resistance.
We then wait for the break above that level of rejection, which will now be a support level we are look for the potential long and continuation.
Note we don’t set the blind limit without confirmation. The first green ellipse is early, no confirmation. While the second green ellipse is our favorite chart set up, why?
Because we got the ROTATIONS. This is the confirmation of the fight and the buyers taking control of the level yet again.
Notice the same happens on the second sky blue ellipse. The break and the retest of that level on multiple rotations.
Real life momentum day trading strategy example
What’s the point of talking about the theory without showing you all an example of a live trade on the S&P 500 futures? Below is a trade taken on the futures on August 12th, 2019, just after the US session open.
The break of this trade begins with the identification of market structure and the momentum of the move. Where is momentum taking price?
The break below our first support level which is the (S1-Support 1 pivot) on strong volume. So as we mentioned before that support that broke is now resistance for the pullback momentum continuation short trade opportunity.
Since we are in a downtrend and momentum is to the downside, we are looking for the short trade on the ES futures.
When price pulls back into that level, we do not set the blind limit! We wait for confirmation of the failure. That means we want to see the rotations at that level.
Once we get the rotations, limit is placed at the top of the rotations just above the newly formed resistance.
Our target? The support zone that price previously failed at. We got that target for a total of a 4.75 point move. That is $237.50 winning trade in just a few minutes.
All due to momentum trading and keeping on the trend.
Risk management is a pivotal to trading. An old trading proverb that TRADEPRO Academy lives by is the following: the profit is the reward a trader receives for managing risk.
A trader is a risk manager first. So, we must talk about risk management.
This includes the risk per trade, and your trade entries and exits.
How much should a trader be risking per trade? We like to go by the 1-3% rule. Meaning 1-3% of your account should be put on the line for a high probability trade.
If you have a $2,000 account that means each trade should hold $20-$60. With a cap set on the day of 5% of your account.
This may seem like a lot, but when trading high leverage futures, it is a reasonable amount.
Let me explain, on the ES S&P 500 futures contract we use a specific trading bracket. The 5/8, meaning 5 ticks of risk for 8 ticks of reward. The futures contracts move is 0.25 point increments which is a tick.
One tick on the ES E-mini futures is worth $12.50. So a 5 tick stop puts you at your maximum risk allowance for the trade. And a 5% daily drawn allows you to get stopped out twice.
However we don’t advocate just getting in the trade and letting it either hit your take profit or stop, but instead scratching when you disqualify the trade for a -2 tick loss max or better yet a +2 tick gain.
That brings us to the E-mini Micro futures. Which are 1/10th of the E-minis. So with a $2,000 account if you are risking 1% per trade, that gives you the ability to trade 3 lots on the Micros.
If you take a full stop on the Micros on 3 lots, that is 5 ticks per lot of $6.25 per lot, all together is a $18.75 loss. Instead of a $187.50 loss on 3 lots of the E-mini’s.
This allows traders to get into the market without breaking the bank.
The risk reward ratio should be at least the 5/8 bracket with the potential for larger targets with more contracts on.
The next step is to qualify the entries and exits.
Entries in trading futures are always a topic of discussion, because there are a lot of whipsaws in the futures market and with a tighter bracket you have to be very zero’d in to catch the right entry.
A tip we have to offer you is: imagine where your stop loss would be on your trade. Make sure its at a level that is very likely that this stop is not hit! Based on that you can calculate where your entry is.
Exits! What is my target? The simple answer is take the 8 ticks when you get them at the beginning of your trading journey! This will create the habit of getting paid in full and build up your confidence and psychology.
When you have multiple lots on, just like in our example, a 3 lot, get paid on the first at 8 ticks so the trade is completely risk free! Your next targets could be previous peak highs and lows or inventory levels. In a strong momentum market, you have the possibility of catching a 10-20-point swing on the ES futures. That is $500 to $1000 per contract!
Journaling and analyzing results
To finish off this momentum trading strategies piece, we invite you to review your trades. What better way to learn than from yourself!
We preach that what makes you a good trader is what you do outside of the market. That involves reviewing your trades and learning from there so that you are a better trader tomorrow.
Take screenshots of your charts and trades, what did you do well, what needs improvement?
Tomorrow when you sit down, revisit your plan and your trades, how are you going to approach the markets today?
If you want to join us in our live trading room, check out the Day Trader package here >
If you prefer to trade more passively, check out our newsletter, trade ideas and live analysis in the Swing Trader package here >
The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.