Building a Fast-Moving Momentum Indicator Using Pure Price Action

 

If you want to build a fast-moving indicator based entirely on the Open and Close of the current and previous candles, you are essentially building a purely price-action momentum system.

By comparing the Current Candle (0) and the Previous Candle (1), you can distill market movement into four primary color combinations. Within those combinations, the exact placement of the Opens and Closes dictates the strength of the momentum.

Here are the most actionable logical conditions you can build, mapped out using clear IF / THEN / AND / OR logic.

1. Previous RED ➡️ Current GREEN (Bullish Reversal)

This combination signals a potential shift from selling to buying. The strength of the signal depends entirely on how high the current close is compared to the previous candle.

• Standard Reversal:

IF (Previous is RED) AND (Current is GREEN) AND (Current Close > Previous Close)

THEN Bullish Momentum Shifting.

• Strong Bullish Engulfing (Total Reversal):

IF (Previous is RED) AND (Current is GREEN) AND (Current Close > Previous Open) AND (Current Open < Previous Close)

THEN Strong Buy Signal (Bears were completely overpowered).

• Weak Reversal (Inside Bar / Failure to Break):

IF (Previous is RED) AND (Current is GREEN) AND (Current Close < Previous Open)

THEN Weak Bullish Pullback (Still in a downtrend).

2. Previous GREEN ➡️ Current RED (Bearish Reversal)

This combination signals a potential shift from buying to selling pressure.

• Standard Reversal:

IF (Previous is GREEN) AND (Current is RED) AND (Current Close < Previous Close)

THEN Bearish Momentum Shifting.

• Strong Bearish Engulfing (Total Reversal):

IF (Previous is GREEN) AND (Current is RED) AND (Current Close < Previous Open) AND (Current Open > Previous Close)

THEN Strong Sell Signal (Bulls were completely overpowered).

• Weak Reversal (Inside Bar):

IF (Previous is GREEN) AND (Current is RED) AND (Current Close > Previous Open)

THEN Weak Bearish Pullback (Still in an uptrend).

3. Previous GREEN ➡️ Current GREEN (Bullish Continuation)

Both candles are green, but the relationship between the Opens and Closes tells you if the trend is accelerating or beginning to exhaust itself.

• Accelerating Trend (Higher Highs):

IF (Previous is GREEN) AND (Current is GREEN) AND (Current Close > Previous Close) AND (Current Open > Previous Close)

THEN Extreme Bullish Momentum (Gap up and run).

• Steady Continuation:

IF (Previous is GREEN) AND (Current is GREEN) AND (Current Close > Previous Close)

THEN Normal Trend Continuing.

• Exhaustion / Loss of Momentum:

IF (Previous is GREEN) AND (Current is GREEN) AND (Current Close < Previous Close)

THEN Momentum Slowing (Current candle is green, but closed lower than yesterday—usually implies a gap down that was bought up, but couldn't break the previous high).

4. Previous RED ➡️ Current RED (Bearish Continuation)

Both candles are red. We look at the closes to measure the dumping pressure and see if sellers are stepping on the gas or running out of steam.

• Accelerating Crash (Lower Lows):

IF (Previous is RED) AND (Current is RED) AND (Current Close < Previous Close) AND (Current Open < Previous Close)

THEN Extreme Bearish Momentum (Gap down and bleed).

• Steady Continuation:

IF (Previous is RED) AND (Current is RED) AND (Current Close < Previous Close)

THEN Normal Downtrend Continuing.

• Exhaustion / Loss of Momentum:

IF (Previous is RED) AND (Current is RED) AND (Current Close > Previous Close)

THEN Momentum Slowing (Current candle is red, but closed higher than yesterday).

Putting It Together: The Master "Buy Signal"

The true power of this logic comes from combining your strongest conditions. If you want to build a single "Fast Moving Buy Signal" for an algorithmic script or scanner, you would string your highest-conviction bullish conditions together using OR logic:

IF

(Strong Bullish Engulfing)

OR

(Accelerating Bullish Trend)

THEN

Trigger Buy Alert.

By relying strictly on the Open and Close, this framework strips away the noise of wicks and lagging moving averages, giving you a pure, instant read on who is winning the battle between buyers and sellers.

 

Add volume conditions to this price-action logic to filter out false signals

 Volume is the ultimate lie detector in trading. While price action tells you what the market is doing, volume tells you how much conviction is behind the move.

When you add volume to your Open/Close momentum logic, you filter out "fakeouts" (low-volume traps generated by retail chop) and only take signals where heavy institutional money is stepping in.

Here is how to build actionable volume conditions and integrate them into your logic.

The Two Core Volume Conditions

To filter signals effectively, you shouldn't just look at the raw volume number. You need to measure volume relative to recent history.

1. The Relative Volume (RVOL) Spike This compares the current candle's volume to the average volume over a recent period (usually a 20-period Simple Moving Average of Volume). A breakout is only valid if volume is significantly higher than average.

• The Logic: IF (Current Volume > 20-Period Volume Average * 1.5) Meaning: The current candle has 150% of the normal trading volume.

2. Increasing Volume (The Confirmation) This is a simpler, faster check. It just requires that the current candle has more participation than the previous candle, confirming that momentum is accelerating.

• The Logic: IF (Current Volume > Previous Volume)

Upgrading Your Price Action Signals

Here is how you inject volume into the price-action conditions we built previously to separate the high-probability setups from the traps.

Upgraded Strong Bullish Engulfing (The "Real" Reversal)

A bullish engulfing on low volume is often a bear trap. To confirm the bears were truly overpowered, the green candle needs heavy volume.

• IF (Previous is RED) AND (Current is GREEN)
• AND (Current Close > Previous Open) AND (Current Open < Previous Close)
• AND (Current Volume > Average Volume * 1.5)
• THEN Confirmed Strong Buy Signal.

Upgraded Bullish Continuation (Filtering the Fake Breakout)

When a green candle closes higher than the previous green candle, it looks like a breakout. But if volume is dropping, the trend is exhausted.

• The Trap (Fakeout): IF (Higher Close) AND (Current Volume < Previous Volume) THEN Ignore Signal (Buyers are drying up).
• The Valid Continuation: IF (Higher Close) AND (Current Volume > Previous Volume) THEN Valid Trend Continuation.

The New "Master Buy Signal" with Volume Filter

If we rebuild your final automated Buy Signal, we simply wrap the price action logic in a volume requirement. The AND acts as a gatekeeper: no volume, no trade.

IF ( (Strong Bullish Engulfing) OR (Accelerating Bullish Trend) ) AND (Current Volume > 20-Period Average Volume * 1.5) THEN Trigger High-Conviction Buy Alert.

A Warning on "Capitulation" Volume

There is one scenario where massive volume means the opposite of a breakout: the exhaustion wick.

If you have an Accelerating Crash (Previous RED ➡️ Current RED making lower lows), but the current volume is absolutely massive (e.g., 300% or 400% of average), that is often capitulation. It means the last remaining retail sellers panicked and dumped their bags into the hands of institutional buyers. This is often followed immediately by a sharp Bullish Reversal.

 

Add a long-term moving average filter so I only take these buy signals in a macro uptrend

 

Adding a long-term moving average (MA) is the best way to boost the win rate of any price-action strategy. When you only take long signals in a macro uptrend, you ensure that the broader market tide is pushing your trade forward, rather than fighting against it.

Here is how you can stack a macro trend filter on top of your existing price-action and volume logic.

The Two Tiers of Trend Filtering

To define a "macro uptrend," institutional traders typically rely on the 50-period and 200-period Simple Moving Averages (SMA). You can apply this in two ways, depending on how strict you want your filter to be.

1. The Baseline Filter (Price vs. 200 SMA)

This is the simplest and most common trend filter. It simply dictates that you are only allowed to look for buying opportunities if the current price is trading above the long-term average.

• The Logic: IF (Current Close > 200-Period SMA)

2. The Trend Alignment Filter (Golden State)

For a stricter filter, you require the medium-term momentum (50 SMA) to be aligned with the long-term momentum (200 SMA). This ensures you aren't buying into a macro downtrend that is just experiencing a temporary dead-cat bounce.

• The Logic: IF (Current Close > 50-Period SMA) AND (50-Period SMA > 200-Period SMA)

The "Rubber Band" Rule (Avoiding Late Entries)

There is a danger when using moving averages: if you buy when the price is too far above the moving average, the market is overextended (like a stretched rubber band) and is highly likely to snap back, stopping you out before the trend continues.

To fix this, you can add a Pullback Zone condition. This ensures you are only taking your Engulfing or Continuation signals when the price is close to the moving average (buying the dip).

• The Pullback Logic: IF (Current Close < 50-Period SMA * 1.05) (Meaning: The price is no more than 5% above the 50 SMA).

The Final "Master Buy Signal" (Trend + Price Action + Volume)

Here is your complete, institutional-grade logic block. It acts as a funnel: it checks the macro environment first, waits for the price-action trigger, and demands volume confirmation.

1. The Macro Environment Gatekeeper: IF (Current Close > 200-Period SMA) AND (50-Period SMA > 200-Period SMA) AND (Current Close < 50-Period SMA * 1.05) (Prevents buying the top)

2. The Price Action Trigger: AND ( (Strong Bullish Engulfing) OR (Accelerating Bullish Trend) )

3. The Volume Confirmation: AND (Current Volume > 20-Period Average Volume * 1.5)

THEN Trigger High-Probability Buy Alert.

By layering these three dimensions—Trend (Moving Averages), Momentum (Open/Close Price Action), and Conviction (Volume)—you have built a highly selective system that filters out the vast majority of retail chop.

Mechanically set Stop Loss and Take Profit for this specific strategy

Mechanically setting your Stop Loss (SL) and Take Profit (TP) removes emotion from the equation. Because this is a momentum breakout strategy, your exits must be tied directly to the price action structures that generated the signal.

Here is how to mathematically and mechanically define your exits for this specific strategy.

The Stop Loss (Where the Trade is Invalidated)

A mechanical stop loss should be placed exactly where the logic of your buy signal is proven wrong. Since we are trading two-candle patterns (like an Engulfing or a Continuation), the Stop Loss belongs just below that specific formation.

1. The Pattern Low (Standard & Most Common) Place your Stop Loss slightly below the lowest point (the wick, not the close) of the two-candle formation that triggered your entry.

• The Logic: If the price breaks below the origin of the momentum surge, the breakout was a fakeout.
• Mechanical Rule: SL = Lowest Low of (Current Candle, Previous Candle) - a small buffer (e.g., 1 tick or 5 cents)

2. The 50 SMA Dynamic Stop (Wider & More Conservative) Because our entry rules dictate that we are buying a pullback near the 50-period SMA, you can use the moving average itself as your line in the sand.

• The Logic: The 50 SMA is acting as dynamic support. If it breaks, the medium-term trend is failing.
• Mechanical Rule: SL = 50-Period SMA at the time of entry - a small buffer

The Take Profit (How to Harvest the Trend)

Because this strategy filters for macro uptrends, the goal is often to catch large, multi-leg moves. You have three mechanical ways to take profit, depending on your management style.

Method A: Fixed Risk-to-Reward (Set & Forget)

This is the most strictly mechanical approach. You measure your risk (Entry Price minus Stop Loss) and set a hard target at a multiple of that risk.

• Risk = (Entry Price) - (Stop Loss Price)
• Take Profit 1 (Scale Out): Entry Price + (Risk × 1.5)
• Take Profit 2 (Final Target): Entry Price + (Risk × 3.0)
• Why this works: If you use a 1:2 or 1:3 Risk/Reward ratio, you only need a 35% to 40% win rate to be highly profitable over a large sample size.

Method B: The Price Action Trailing Stop (Dynamic)

Since you are using Open/Close logic to enter, you can use the exact opposite logic to exit. You let the trade run until the market prints a valid Bearish Reversal signal.

• Exit Trigger: IF (Previous is GREEN) AND (Current is RED) AND (Current Close < Previous Open) (A Bearish Engulfing against your position)
• Why this works: It allows you to stay in a massive trend for a long time, but it requires discipline to give back some open profits when the reversal finally happens.

Method C: The Fast Moving Average Trail

Instead of a fixed target, you introduce a faster moving average (like the 8-period or 21-period Exponential Moving Average) just for trailing your stop.

• Exit Trigger: IF (Current Candle Closes below the 8-EMA) THEN Close Position.
• Why this works: It tightly hugs fast momentum breakouts and mechanically pulls you out the moment momentum stalls.

Tying It Together: The Execution Loop

When your automated system or scanner triggers the Master Buy Signal, your immediate mechanical workflow is:

1. Enter Trade: Buy at the Close of the trigger candle (or the Open of the next candle).
2. Set Hard SL: Immediately place a stop order below the lowest point of the two-candle trigger pattern.
3. Determine Position Size: Calculate how many shares/contracts to buy so that the distance between Entry and SL equals exactly 1% to 2% of your total account capital.
4. Set TP / Trail: Either set limit orders at 2x and 3x your risk, or activate your mechanical trailing exit (e.g., closing below the 8-EMA).

Calculate my exact position size mathematically so I only risk 1% of my account if my Stop Loss is hit

To perfectly control your risk, you need to calculate your position size based on the distance to your Stop Loss, not just by throwing a fixed dollar amount at every trade.

Here is the universal formula professional traders use to ensure they never lose more than their predefined limit (e.g., 1% of total account equity) on a single setup.

The Universal Position Sizing Formula

Here is exactly how to calculate the variables for that formula, step-by-step:

1. Determine Your Total Account Risk

Calculate what 1% of your total trading capital equals in dollars.

• Formula:
• Example: If your account is $10,000, your Total Account Risk is $100. (This is the absolute maximum you will lose if your Stop Loss is hit).

2. Determine Your Trade Risk Per Share

Calculate the exact dollar difference between your intended Entry Price and your mechanical Stop Loss.

• Formula:
• Example: You want to buy a stock at $50.00. Based on the engulfing pattern logic, your Stop Loss goes at $48.50. Your Trade Risk per Share is $1.50.

3. Calculate Your Position Size

Divide your Total Account Risk by your Trade Risk Per Share.

• Calculation:
• Result: You will buy 66 shares.

The Crucial Distinction: Risk vs. Capital Deployed

Many newer traders confuse "Risking 1%" with "Buying 1% worth of stock." These are completely different concepts.

In the example above, you are buying 66 shares at $50.00 each.

• Capital Deployed: $3,300 (33% of your total account is tied up in this trade).
• Capital at Risk: $99 (Because if the price drops to your $48.50 stop loss, you sell those 66 shares and only lose $99, which is ~1% of your $10,000 account).

By using this formula, your position size dynamically adjusts to market volatility. If your Stop Loss is very tight, you buy more shares. If your Stop Loss is very wide, you buy fewer shares. In both scenarios, your exact monetary loss remains strictly at 1% if the trade fails.

Warm Regards,

Amit Raj

Author, Learner and Trader