The momentum-shift signal is a universal principles that is required in all our trades. Most reversal traders make the mistake of entering way too early, always trying to call a top and bottom. As the famous market wizard Jesse Livermore said:
One of the most helpful things that anybody can learn is to give up trying to catch the last eighth – or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.
The momentum-shift signal, as you will see, helps us get into trades at a later stage but with a lot more context and confidence.
Let’s recap:
▪ We use the 20 period SMA as an entry filter. It keeps us from picking tops and bottoms
▪ We require a strong, high momentum break of the 20 SMA
▪ Sometimes, the moving average won’t help (we will explore that later), but when we trade with trendlines and other local structures, we also always require a high momentum break
▪ Trading with the momentum is key
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