Top 5 Questions New Momentum Traders Ask About ASX Trading

Introduction

New momentum traders often feel overwhelmed by the technical aspects of systematic trading on the ASX. After analysing hundreds of member questions and comments from our YouTube community, five key concerns consistently emerge. These fundamental questions reveal the gap between understanding momentum concepts and applying them confidently in real market conditions.

At Finer Market Points, our systematic approach to momentum trading has helped thousands of Australian investors develop structured frameworks for market participation. The insights covered here represent the most crucial educational concepts for anyone beginning their momentum trading journey on the ASX.

Watch Gary discuss which Moving Averages are most used by Momentum Traders

Question 1: Which Moving Average Should I Use for Stop Losses?

The choice between 10-day, 20-day, or trailing stop methods creates significant confusion for new momentum traders. Our research comparing these three approaches across multiple ASX momentum leaders reveals surprising results about their relative effectiveness.

Comparing Different Stop Methods

When examining identical entry techniques across high-momentum ASX stocks, three distinct stop-loss approaches emerge:

10-Day Moving Average Approach: Provides tighter control and faster exits when momentum falters. This method typically stops traders out earlier, capturing smaller gains but potentially preserving capital during swift reversals.

20-Day Moving Average Method: Offers more breathing room for volatile momentum stocks. While this approach may capture larger moves when stocks continue trending, it can also result in giving back more profits during consolidations.

3-Day Trailing Stop: Uses the low of the previous three days as a dynamic stop level. This method aims to balance the responsiveness of shorter timeframes with the stability needed for momentum continuation patterns.

The Surprising Research Results

Analysis of four consecutive B-wave breakout trades on a leading ASX momentum stock showed remarkably similar total returns across all three methods. The 10-day approach generated 801 points of profit, the 20-day method achieved 878 points, and the 3-day trailing stop produced 876 points.

This research suggests that consistency in application matters more than the specific moving average chosen. Each method works better in different market conditions, but over multiple trades, the differences largely balance out.

Practical Application Guidelines

For Australian momentum traders, consider these factors when selecting your stop-loss method:

• High-volatility sectors (mining, technology) may benefit from 20-day moving averages

• Established momentum leaders often respond well to 10-day approaches

• Newer momentum patterns might suit 3-day trailing methods

The key insight for educational purposes: developing proficiency with one consistent method outweighs frequently switching between different approaches.

Question 2: Should I Take Partial Profits or Hold My Entire Position?

Professional momentum traders frequently sell portions of their positions "into heat" while letting remaining shares ride using moving average stops. New traders often worry this approach caps their upside potential.

The Professional Approach to Profit-Taking

Professional momentum traders commonly implement a systematic approach to profit-taking:

• Risk Multiple Strategy: Take profits at 2x or 2.5x the initial risk amount

• Partial Position Sizing: Typically sell 25-50% of the position into strength

• Trailing Remainder: Let remaining shares ride using moving average stops

Research Results on Mixed Approaches

When combining partial profit-taking at 2x risk with moving average trailing stops, the results challenge common assumptions about "capping upside."

Analysis shows that selling half the position at 2x risk and trailing the remainder with a 10-day moving average actually improved total returns from 801 to 814 points. The 20-day trailing method changed from 878 to 853 points - a minimal difference considering the psychological benefits.

The Smoothing Effect

The most significant advantage of partial profit-taking isn't necessarily higher returns, but smoother, more consistent results. Instead of experiencing large winners followed by small gains or losses, the mixed approach produces more predictable outcomes.

This psychological benefit helps traders maintain discipline and continue applying their systematic approach over time. As momentum trading requires emotional resilience, the "cash register effect" of regular profit-taking supports long-term success.

Educational Takeaway

For learning purposes, understand that partial profit-taking at 2-2.5x risk multiples doesn't significantly reduce total returns while providing psychological benefits that support consistent application of systematic approaches.

Question 3: How Do I Time Market Participation?

Market timing represents one of the most challenging aspects of momentum trading. Understanding cyclical patterns and market structure helps inform participation decisions.

Understanding Market Cycles

Historical analysis reveals important patterns in ASX market behaviour:

Midterm Year Patterns: Every four years, markets often experience significant lows in June-July or October periods. These "midterm years" frequently produce explosive moves out of major lows.

Decade Cycle Considerations: The second year of each decade historically shows tendency for bear market lows, particularly around early October timeframes.

Volume and Follow-Through: Post-low rallies typically require confirmation through "follow-through days" - advances of 1% or more on increased volume, occurring 4-7 days after an attempted rally begins.

Practical Market Assessment

Rather than attempting to predict exact timing, focus on recognising market structure conditions:

• Leader vs Laggard Behaviour: When previously strong sectors begin showing relative weakness while former laggards suddenly attract attention, market rotation may be occurring

• Volume Characteristics: Declining volume during pullbacks and expanding volume during advances suggests healthy momentum structure

• Sector Rotation Signals: Universal bullishness toward previously hated sectors often signals late-stage moves

Application for Momentum Traders

The educational framework suggests monitoring these structural elements rather than trying to time exact market turns. Momentum traders benefit from understanding cyclical tendencies while maintaining systematic approaches to individual stock analysis.

Question 4: What Risk-Reward Ratio Should I Target?

Risk-reward considerations form the foundation of sustainable momentum trading approaches. Understanding how professional traders think about this relationship helps develop appropriate expectations.

Professional Risk-Reward Framework

Experienced momentum traders often structure their thinking around multiples of initial risk:

• Minimum Targets: Many professionals won't consider trades without 3:1 risk-reward potential

• Partial Profit Levels: Taking portions at 2-2.5x risk provides consistent cash flow

• Statistical Reality: Achieving 3:1 rewards approximately one-third of the time aligns with systematic approaches

The Psychology of Winners and Losers

One powerful way to conceptualise risk-reward relationships: big winners fund multiple small losses. If a momentum trade generates 7-8x the initial risk, that single winner can absorb seven consecutive small losses while maintaining profitability.

This framework helps traders accept inevitable losses as part of the systematic process rather than personal failures. Each small loss represents tuition in the education of becoming a skilled momentum trader.

Practical Risk Management

Educational guidelines for risk-reward thinking:

• Keep losses small: Wide stops (7-8% of position value) require correspondingly larger profit targets

• Let winners run: Systematic trailing methods allow profitable trades to reach their natural conclusion

• Accept the process: Some trades will fail quickly, others will exceed expectations - both outcomes are normal

The key insight: risk-reward ratios work over series of trades, not individual positions. New traders benefit from understanding this statistical reality rather than focusing on single-trade outcomes.

Question 5: How Do I Identify Relative Strength?

Relative strength - stocks that hold up well during market weakness - represents one of the most powerful momentum concepts. This pattern often signals accumulation by sophisticated investors.

Recognising Relative Strength Patterns

Strong stocks demonstrate several characteristics during market stress:

Volume Behaviour: Light selling volume during pullbacks indicates lack of selling pressure. Professional accumulation often occurs quietly without dramatic volume spikes.

Price Structure: Stocks forming higher lows while broader markets decline show impressive relative strength. These patterns suggest underlying demand at higher price levels.

Sector Context: Individual stocks outperforming their sector peers, particularly during sector weakness, often indicate company-specific strength drivers.

Practical Identification Methods

Educational framework for spotting relative strength:

• Compare individual stock charts to sector indices: Stocks holding key support levels while sectors break down show relative strength

• Monitor volume characteristics: Strong stocks often show minimal selling volume during market stress periods

• Watch for upgrade confirmation: Analyst upgrades following relative strength patterns often confirm the underlying strength thesis

Application Strategy

When broader markets show volatility and selling pressure, stocks demonstrating relative strength deserve attention from momentum traders. These patterns often precede significant breakouts when market conditions improve.

However, confirmation through proper breakout patterns remains important. Relative strength alone doesn't guarantee immediate profits - it identifies candidates worth monitoring for proper entry opportunities.

Take Your Momentum Trading Education Further

The concepts covered here represent fundamental building blocks for ASX momentum trading success. Understanding moving averages, profit-taking strategies, market timing, risk-reward relationships, and relative strength provides the foundation for systematic trading approaches.

FMP YouTube members access advanced applications of these concepts through our weekly 3030 Report, featuring:

✓ Current ASX stocks displaying these exact patterns and setups ✓ Detailed Launch Pad opportunity analysis (released to members 24+ hours before public) ✓ Community discussions with Gary Glover and experienced momentum traders ✓ Ability to submit specific analysis requests for educational purposes

Complete Educational System: → 800+ video library covering comprehensive momentum concepts → Weekly live analysis applying these principles to current market conditions→ Member community for strategy discussion and learning support

Early Access Advantage: → Launch Pad opportunities identified before becoming widely recognised → Member-only educational content and market insights → Priority consideration for specific analysis requests

Watch how members use Thursday's 3030 List to identify the best momentum stocks before market close, giving them first-mover advantage on ASX leaders

Current members gain systematic approaches to applying these five fundamental concepts in real market conditions

Key Takeaways

New momentum traders often overcomplicate these essential concepts. The research reveals several important insights:

Consistency trumps perfection in moving average selection. Developing proficiency with one systematic approach produces better results than constantly switching methods.

Partial profit-taking enhances psychology without significantly reducing returns. The smoothing effect of taking some profits at 2-2.5x risk multiples supports long-term systematic application.

Market timing requires patience and structure recognition rather than prediction attempts. Understanding cyclical tendencies helps inform participation decisions without trying to pick exact turns.

Risk-reward ratios work over series of trades, not individual positions. Accepting this statistical reality helps maintain discipline through inevitable losing periods.

Relative strength identification provides powerful momentum signals when combined with proper entry techniques and broader market awareness.

For Australian momentum traders, mastering these five fundamental areas creates the foundation for systematic market participation. The key lies in consistent application rather than perfect execution of any single concept.

Continue developing your momentum trading education by exploring our related content on sector rotation analysis and Launch Pad pattern recognition.

Disclaimer: Finer Market Points Pty Ltd, CAR 1304002, AFSL 526688, ABN 87 645 284 680. This general information is educational only and not financial advice, recommendation, forecast or solicitation. Consider your objectives, financial situation and needs before acting. Seek appropriate professional advice. We accept no liability for any loss or damages arising from use.

b