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Everything I do is focused around the idea that I must identify the sentiment of the market. I believe it’s the organization of sentiment that creates momentum. For me, momentum is the acceleration often seen when prices are able to trade through a key support or resistance level. I call these “decision” levels because market participants are indeed making a decision as to whether they will accelerate, stall, or reverse price direction at the certain level. The idea behind momentum is that the sentiment is organized enough to allow for more emotion to build and carry prices in a certain direction – usually the catalyst is some sort of price break. Consider that the market moves in the direction of the most stops. As these orders are hit, essentially turning them into instant market orders, the size of the move can often be considerable if there are enough orders waiting at a particular price area. I believe this is why psychological levels are such powerful decision levels. For example, think about the size (orders) waiting at “00” price levels.

If it all begins with sentiment, then the logical question to ask would be: What effects sentiment? Sentiment in a basic way can be described as bullish or bearish opinion. They are always both present in the market, however, it’s the balance of these two opposing opinions that we are watching. The imbalance in sentiment to one side or the other, ORGANIZED, creates momentum. So economic events and data releases are certainly important as is the ANTICIPATION (discounting) of these events. We’ve already discussed that price levels create shifts in sentiment, so this means trendlines, support, resistance and moving averages like a 20, 50, or 200 simple can also affect market opinion and therefore direction.

In my opinion, watching for sentiment to organize at the decision level is how to be amongst the first to recognize momentum. If momentum in turn can build and organize, a trend is the result. A trend is simply then the organization of sentiment, turned into momentum which then builds. The building of momentum often attracts more buyers in a move higher or sellers in a move lower and thus can often feed itself.

I use GRaB candles to identify sentiment and momentum. If I am seeing a dominance of green candles I know that prices are closing above the 34 period EMA high. The green GRaB candles confirm bullish sentiment and momentum. In my opinion, it’s the continuation of both that will affect the angle of my 34EMA Wave and (potentially) carry it higher to a twelve to two o’clock angle which then confirms the mark up trend. Consider the opposite: red GRaB candles. The red reflects bearish sentiment and momentum as prices close below the 34 period EMA low. The continuation of this can pull the 34EMA Wave lower to a four to six o’clock angle and confirm a mark down trend.

Consider the most powerful sentiment, momentum, and trend of the daily. This is why the Directional Bias of a pair must be considered before entering any trade. Understanding what the “overall” (daily) opinion of the market is will prevent you from swimming upstream on longer-term intraday time frames like the 60 and 240-minute charts. The five and 15-minute charts are better suited to entering trades that are not in harmony with the Directional Bias because the organization of sentiment, momentum, and trend do not need to be long-lasting to see a set up trigger into trade and follow-through. The basis of this opinion comes from understanding pip movement as it applies to the daily price ranges and how the shorter-term time frames need but a fraction of this price movement to allow for a completed trade. (A “completed” trade is one that triggers and follows through to either the stop-loss or profit target.)

I believe as traders it’s our job to not only identify the support, resistance, and trendlines on a chart but determine whether these decision levels are being reacted to and HOW they are being reacted to (acceleration, stall, or reversal of price). By watching this price action we can then have a clearer picture of sentiment, momentum, and trend on any time frame.

For more on this week’s series on market psychology and price action visit my Daily Trading Edge blog.

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.