Forex Strategy Enhancer: Velocity and Magnitute
Hey, traders, welcome to Video 17 of the Advanced Forex Strategies Course. This is Corey Mitchell, and in this video we’re taking a little break from the strategies and instead in this video we’re looking at a strategy enhancer, which we’ll call velocity and magnitude. These are ways to interpret the price action. We can use it on all timeframes, brought to you by Investoo.com.
So I will say in almost every video trend trading is where the money is, and we can analyze that trend in terms of velocity and magnitude. Velocity is the speed at which price is moving; magnitude is the distance it covers.
Combine these two, velocity and magnitude, are more powerful than just one or the other. We can compare velocity and magnitude of recent waves and help determine when the trend is reversing or if it’s just a pull back in a trend.
So we should know all waves are relative to recent waves; there are no absolutes. So a 50-pip wave, for example, doesn’t mean anything until it’s compared to other recent waves. Is 50 pips big? Is it moving fast? We need to compare this to other waves. There aren’t any absolutes.
Waves of large magnitude in the direction of the trend confirm that trend. Waves of large magnitude against the trend indicate a reversal. So this should tie in with some of these strategies we’ve been covering. This is the theory behind it. If you think back to the cup and handle, or snap back strategies, these were based on large magnitude waves going against the trend.
Waves of small magnitude in the trending direction indicates that the trend is slowing. Waves of small magnitude on a pullback show the pull back is weak compared to the trend. So again, this is relative. If you have a large wave moving in the trending direction and a small wave pullback that helps show you that pullback is weak and the trend is likely to continue.
I should point out that nothing is 100% in trading. There are no absolutely sure things. These are simply signs or things we can use to help us trade, make decisions. But once again, these aren’t always going to be perfect.
So velocity is an enhancer; it helps confirm how we interpret magnitude. So magnitude and a velocity together are extremely powerful. But velocity without magnitude doesn’t really mean a whole lot. We see quick moves all the time; they don’t really mean anything unless that buying or selling pressure is sustained, which would be the magnitude that it’s being pushed in a certain direction.
So I’m going to go through these charts to help, I have a one-minute chart that’s applicable to all timeframes, but since I haven’t given too many examples from a day trading perspective and I’ve looked at a lot of hourly charts, I thought I’d go through this one on the one-minute to just give a bit of perspective from the day trading side.
So yellow is highlighted; this is the London session as we move forward in time. This is where New York opens; this is where London closes and just the New York session.
So this is what we call the overlap period, so Euro/USD. We’re going to look at this just in terms of velocity and magnitude, because it helps us determine the trend, and a lot of when we’re going to be using those other strategies that we’ve been talking about.
Now here is a strong move down; we have a very sharp reversal of equal magnitude. So at this point, throughout these waves we have to be able to look at it in real time, and if we had a sell signal somewhere in here we’d still have to take it, because at this point the overall momentum is down.
At this point here, once it starts to approach the magnitude of the former wave, and we also have some velocity here to the upside, meaning the bars are moving quite quickly. We are covering a lot of distance in a short period of time. We would stop looking for shorts, simply because this has matched, this is aligning with some of our cup and handle snapback strategies. And we have a lot of velocity to the upside. We can see this pullback here, more of a pause than a pullback; the waves are extremely small.
So we look at these price bars compared to the bars of the uptrend. And we can see these are much smaller, so as these are forming we can see that overall momentum is still up because these bars are much bigger than these pullback bars.
As we move forward we can still see the up much more powerful. So if we’re taking any signals we want to be focusing mostly on the uptrend at this point. There is no sign to indicate that this is over yet. Once again we have another pause, very little movement to the downside. We don’t have anything; this red bar still much smaller than these up bars that we saw prior.
Now we can start to see a bit of a shift here. We have some strong red bars, which are bigger than these prior up bars, but not quite as big as the ones that we had here. But we are starting to see those red bars creep in. There is some back to the upside, but we can’t make it to that former high, so that up bar or the green bars in here are smaller than the prior up bars, which got us up to this point.
So we have some potential trouble here, and we’d either want to step aside or wait for the market to confirm. If we’re looking at a bit longer timeframe this overall movement we still could be looking for trades.
Now we can see that this shifts, because the large bars start moving to the downside instead of the upside, and we can see this in real time. So at this bar we have to start thinking that this uptrend is in trouble simply because the size of the moves have shifted from large moves up to large moves down.
Strong bars here again; and we see the pullback, these green bars, against this current downtrend now are much smaller than the bars that we just saw. So strong red bars to the downside, lots of magnitude, meaning that these are large, they are covering distance. And remember we’re looking at relativity; it doesn’t matter if these are one-pip, ten pips, 50 pips; we’re looking at relative size.
So these are smaller than this; these green bars are smaller than these red bars, which means the next most likely move is to the downside again, because there’s no momentum here to the upside. We are looking at these, no real velocity or magnitude to the upside. It’s very small compared to these prior down bars, so we’re expecting the price to continue to go lower. We see this strong red bar.
Once again as we move higher, little bars in here showing a lack of strength. We would at this point still be expecting the price to move down; instead it pops higher and we get a strong green bar, but still not as strong as this prior down bar or many of these red bars. And we have a strong sell.
Now we get what I’d call sort of a choppy market where you have equal magnitude and velocity in both directions. You have some very strong green bars; you have some very strong red bars. And it’s very choppy. There is no real trend here.
So let’s get forward a bit; you have some strong selling and this comes close to reaching that former level, but this is sheer. This only takes two bars to cover all this distance, whereas this is much choppier. It takes a number of bars, probably about ten bars from here to here to reach that same distance.
So we still have to assume that these sellers on these two bars were stronger than these buyers which took multiple bars to get up. So we’re thinking that still momentum is to the downside, simply because you look at this selling compared to this buying. It’s much more choppy.
Here is a strong shift in momentum. You’ll notice a little bit choppier on this one compared to this down move. This down move of two bars, very strong; this one a little more choppy. So the sellers were a bit more hesitant on this one. And then we see that strong shift in buying, and we also made a higher low. So we combine velocity and magnitude with other things that we’ve learned, such as analyzing trends based on higher highs, higher lows, that sort of thing.
So here we have a higher low, plus a little bit weaker down move than what we saw last time. A very strong up move takes out the former high, so this is where we’re looking at snapback type strategies, cup and handle. Another nice strong run, lots of green bars.
We see a little bit more hesitancy here. You can see this wave from here to here; it covers about five pips. This next move up covers two and a half; this next one up, three and a half, this next one up two and a half. You can see they are getting progressively weaker, and you can see that as it’s occurring in real time. As you’re watching this you can see each one is getting slightly weaker.
So what does that tell you? It says the buying momentum is slowing. Now it doesn’t mean that we’re in for an immediate reversal, or that this can’t all of a sudden pick up momentum and fly higher. All it does is help us assess the probabilities and say, this is maybe running out of gas. And it does; we see these strong red bars indicating a very strong shift in momentum. These red bars are bigger than most of these green bars, which indicates the trend has shifted back down.
This is why we look at strategies like the snapback and why I’m willing to assume that once we see a strong move like this it’s going to continue. In this case it doesn’t continue right away, but we get a pullback and we do start to move lower again.
So we’re assessing the probabilities; we’re looking at magnitude and velocity of each wave compared to prior waves and the overall movements within the day to help us assess whether we’re more likely to go up and down.
Here, these are types of markets we want to just avoid where everything is equal. We have no real overwhelming pressure to one side or the other. Here you can see overwhelming buying, weaker bars on the pullback, overwhelming buying. Here it’s very back and forth, very choppy. We have no clear direction. So those are times we just want to stay outside.
Here again, you have sharp shift down, sharp shift up, sharp shift down. It’s very hard to trade in this; it’s very choppy. And as we said, we like to trade trends; there is no trend here.
Here we can move out of a little consolidation and we have a sharp move to the upside; a pause, bars are smaller, weak move to the upside. But the pullback also isn’t strong, so even though we had a little bit of a weak move here to the upside, nothing indicates that they are strong sellers either. So you would still be looking for the move higher.
Once again, nice moves to the upside; this is a pretty big red bar here, but it doesn’t even come close to really counteracting the movement of these bars here as opposed to these red bars, which give us the snapback strategy. We have a full-on reversal, sharp pullback to a former low, and we’re expecting that. We have velocity and magnitude to the downside, completely erasing or negating the velocity and magnitude we just had to the upside. Shifts are perspective that we are going to move lower.
Now there is nothing here. I would have expected this to continue lower. It did not; it stalls right at the former low. You can see a very strong pullback, and now this is where we say we have a small wave and a trending direction; can’t even get to that former low. So we’re seeing that stalling in momentum again. And then we see a bit of a pullback against that, and the buyers step in and start taking it back up.
So this is what we do in real time as we’re going through; we have to assess looking at each new wave as it forms, each new bar as it forms. What is this telling me? How does it compare to prior waves, prior bars? And we can use this to assess probabilities in real time, and it’s a bit of an art. But it is quite mathematical in the sense that all we’re doing is looking at, all right, how far did this one move, how far is the pullback.
This one tried to go back up but couldn’t, so small bars in the direction of the trend indicate that that trend may be in trouble. Here no trouble for the uptrend. Here much smaller bars going in the trending direction, so right away we start to see it stall right away, so we have some indications that that trend is in trouble.
So go through your charts and try to do this, especially on a one-minute chart, because you can see there are so many changes in direction in the day. And then maybe try it on a five-minute chart or a 15-minute chart, or an hourly chart, a daily chart. And you’ll really be able to see and get good at spotting where the next likely direction is.
And remember, as I said in the last video, you’re not going to be right all the time. And you don’t need to be to make money. If you’re right five, six, seven times out of ten and you’re making more in your winners and your losers; you have an extremely profitable strategy.
So all this does is help us assess some probabilities; it helps us become a lot more confident in our trades so we can jump in on some of those entries I’ve been teaching you, which are fairly aggressive and give you fantastic prices. And you’re able to have confidence to take those once you go through these charts and you say, all right, I can see this moved down. It moved all the way back up, and the next likely move is probably up, because it erased this entire down move. We have velocity, magnitude, all to the upside; the next move is likely higher. And in this case it was.
And it’s easy to do it in hindsight. I want you to go through, starting from the right of your chart, and go through, picking out when the trends are, so when you actually want to be trading.
When there is no trend, here very choppy, equal up and down moves, and is probably not something we want to be involved in. And just do that; go through it, do it for like an hour. And then the other night do it for half an hour, and then another night do it for an hour again. And just go through this and you’ll become very good at reading the price action and you’ll be able to determine when to incorporate and put into play these other strategies I’ve been teaching you.
So let’s just go through a quick review. We already went over these but quickly. Waves of large magnitude in the direction of the trend confirm that trend. We expect it to continue. Waves of large magnitude against the trend indicate a reversal, such as our cup and handle snapback.
Waves of small magnitude in the trending direction indicate that trend is slowing. It doesn’t mean it’s going to necessarily reverse right away or that it can’t speed up again. It just shows that it’s slowing.
Waves of small magnitude on a pullback show the pullback is weak compared to the trend and therefore the trend is likely to continue. And velocity helps us just assess the strength of that magnitude, so velocity and magnitude are extremely powerful.
Velocity, if you just have a quick bar it doesn’t mean whole lot; you do want to be comparing it to how big is that bar compared to other bars in recent waves.
So until next time, happy trading. Practice this, getting your demo account, maybe place some trades using it, using some of the other strategies we talked about, but just move through your trades moving to the right as moving forward into time and try to predict where the next wave is based on velocity and magnitude.
Until next time, happy trading.