New traders are taught that buying after a big up move is chasing, and chasing is bad. The advice is half right. Buying strength is not the problem; momentum traders buy strength for a living. The problem is where in the move the entry happens. An entry at the top of an extended bar, far from any level that could serve as a stop, turns a good read of direction into a bad trade, because the stop has to be so wide that the position is tiny or the risk is too large. The same read, executed at a better location inside the same move, is a good trade. Entry location is the skill.
The pause inside the move
Strong moves rarely go straight up. They move in pushes separated by short pauses: two or three bars of sideways or slightly counter-trend action where early buyers take some profit and new buyers wait. These pauses form small flags or tight ranges, and they are the momentum trader's entry points. The pause gives you a level, its low for a long trade, that defines risk tightly. When price breaks the top of the pause in the direction of the move, momentum has resumed, and you are in at a location where the stop is a fraction of the distance it would have been at the top of the impulse bar.
- The first pause after ignition is usually the best one. Fewer participants have noticed the move, and the pullback holds above the breakout level.
- Look for pauses that are shallow, retracing less than about a third of the previous push, and short, a few bars rather than a dozen.
- A pause that deepens into half or more of the push, or that drags on, is telling you momentum is fading. Treat it as a range, not a flag.
When you missed the start
Everyone misses moves. The temptation after missing ignition is to jump in immediately to avoid missing the rest. Resist it, but do not give up on the move either. Write down the level at which you would enter if price paused: the top of the next flag, or a retest of a short moving average such as the 9 or 20 EMA on your trading timeframe. Then wait. If the move continues without pausing, it was going to be a poor-location trade anyway, and letting it go costs you nothing you could have safely captured. If it pauses, you now have the entry you wanted.
A rule worth writing down
A simple rule captures most of this: never enter a momentum trade more than one ATR away from a level that could serve as your stop. If the nearest logical stop is further than that, the entry is a chase, and the trade waits for a pause. The rule will cost you the occasional move that never pauses. It will save you far more often, from the trades taken at the top of a bar that turned out to be the climax.