The momentum trade will be something a little more familiar with already "experienced" traders. The trade consist of going long/short an issue, adding to the position one time, and setting a defined stop loss and stop target. The trade, as all trade technique I use, is derived from utilizing and exploiting the deleverage and reset (compensation) levels of an extension. The deleverage and reset levels are covered more thoroughly here. The trade enters an initial position, in the direction of the primary extension, at the deleverage area of the extension. The trade then goes in your favor, which you exit when the existing high/low of the extension is matched, or moves against you to the reset level. The reset level is where the second lot is added (same size as the intitial entry), for an issue that compensates the extension is now free to launch once again in the direction of the primary trend/extension. After the addition at the reset level, the trade moves in your favor, which you exit when the high/low of the extension is matched, or exit at a loss if the reset area is decisively broken.
The momentum trade is a great tool to hedge existing fade positions. Theoretically, they are the same design, or have the same end objective, to limit market exposure when capital allocation limits are being threatened. When trading an extension with a fade technique, see primary extension trade and/or secondary extension trade, the trade is deleveraged if the current capital "utilization" approaches the capital "allocation" limits set within the trade. This is done at the deleverage area, which would be "break even" level of the trade. At this point you can position size to allow for further extension with more buying power backing the trade, thus reducing risk and locking in more travel from deleverage to reset. If fading an upward extension you are shorting, thus you would cover a portion of these shorts at the deleverage area if the trade scenario required it. Hence, you are limiting your short exposure. The momentum trade limits short exposure by offsetting delta by going long at this area. You are thus adjusting overall portfolio exposure, thus hedging utilizing this technique against your fade trades. This trade can be executed without the existence of an initial fade trade however.
Where this trade differs from all other techniques listed is the fact that it does not exploit the markets obligatory bias. It attempts exploiting the markets "potential", thus, there is no obligation and the use of a hard defined stop is an absolute must.
The information listed in the newsletter regarding this trade will include:
Entry price
add/exit level
exit/exit level
profit at successful exit (1 and 2)
Loss at stop
