Now let us see how The Ultimate Momentum Indicator can be used in to enter in to the short term position trades.
Straight Long or Short positions in Nifty Futures in accordance with the momentum shifts indicated by the Momentum Indicator. For example let us go back to the momentum shift which happened on 1st Apr. 2011 which is described in the page titled The Indicator. Here is the chart of the the Nifty futures as on the date of the buy signal:
Nifty Future as on 1st Apr. 2011
The suggested trade in this mode of entry would be buying Nifty futures at the close at around the last traded price of 5500. The natural question which arise now is the stop loss point applicable to this trade. The suggested stop loss points for this trade is the minimum (a) previous minor high (b)5% of the of the futures closing price added to the closing price.
If we examine the trade setup we can observe the following:
1. The previous minor high was formed at 5357 on 21st March.
2. The entry price of 5500 plus 5% of the entry value is 5225.
In case of short positions instead of adding 5% with the entry price it needs to be subtracted.
In addition to the absolute stop loss already described as above, the trade is also to be protected with a trailing stop of approximately 5% from the maximum favorable point achieved by the futures after the initiation of the trade.
The trade is exited when (a) the Momentum Indicator gives a neutral value or indicates a reverse trade, and/or (b) any of the stops, either the absolute stop or the trailing stop is hit.
If you provide stop loss less than 5%, it may lead to unexpected exit for potentially big trades as it involves high volatility. It is observed that 5% trailing Stop Loss is hit very rarely. Most of the time you will exit the trade due to neutral or reversal signal.
This is the riskiest way of entering the trades based on the Momentum Signal and therefore it may offer the highest reward.
We have just described the basic structure of entries and exits using the Ultimate Momentum Indicator. We have also described the position limits briefly and the methods of keeping the stop loss points in detail. Now let us try to understand why these rules are necessary to ensure the long term survival of a trader. Please read the next page titled Position Limits for a detailed description of the position limits. Also read the page named Risk Analysis.
Cheers and Prosperous Trading!
