Don't deny momentum.
Markets can do whatever they want at any time. But when a market triggers forcefully out of a momentum situation, strap on your helmet.
(BPU2:CME) moved forcefully out of a pullback from a high Monday after defining itself as a high-velocity momentum market during its impressive June run. The pound triggered Monday after moving above the high of the low bar in the pullback, above $1.5162. Monday's move was classic, coming as it did after a four-day pullback.
But when markets gap open, they can be difficult to enter because they may appear overextended. This was the case Monday after the pound gapped above its $1.5162 trigger. One way to enter momentum markets is on a breakout of the opening range. First, realize the pound yielded subtle clues that it was a momentum play back on
April 16. But more recently, the pound has established itself as a momentum market by remaining persistently above its 10-day moving average. Importantly, notice that on Friday the pound touched its 10-day line, although it still managed to close above it.
To trade opening range breakouts, the gap must be in the direction of the momentum. Wait for the completion of the first five-minute bar, the opening range. For up-trending markets, place your order to go long above the high of the opening range. Your stop is placed below the low of the opening range bar. This method can be applied to any (momentum) market. Here is how the trade worked out in the pound Monday.
(CZ2:CBOT) are also momentum markets that are set up this morning in similar pullback-from-high situations.
(CLQ2:NYMEX) broke down in its biggest down move in five weeks, a situation I wrote about on
Monday. This is a good example of how you can use volatility contraction and key retracement and projection (resistance) levels to participate in larger-than-normal moves. Also bear in mind that crude and natural gas now have smaller-sized
e-miNY contracts based on the standard-sized contracts that trade electronically on Globex. The initial margins are $1,080 for crude oil and $1,350 for natural gas. The contracts are 40% the size of the standard-sized contracts.
Marc Dupee is an independent trader and co-author of the book
The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to
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