Generally, this means purchasing winning stocks and selling them when the momentum reduces. But the key to succeeding is finding the right stocks that have high momentum. Basically, the whole idea is trading stocks that are on their way up and selling them right before the trend reverses.
For more on how to day trade momentum stocks, how to find momentum stocks, and determine the momentum in stocks, please read on.
What are momentum stocks?
Momentum stocks are shares that are in the middle of a bearish, solid, or bullish trend. They are not highly volatile. But they are steadily moving downwards or upwards for an extended period with little to no interruption.
Unfortunately, the high momentum stocks tend to slow down eventually, thanks to a change in a trend. The main objective of investing in these stocks is to invest when the momentum in stocks is strong and then sell when it reduces.
Therefore, you should avoid holding them when the trend reverses. So when looking for high momentum stocks, you should look for the ones that are consistently moving up or down for days and even months. But you’ll need some top momentum stocks today to benefit.
How to use momentum indicators for trading?
Momentum trading is an exceptional practice that involves investors selling and purchasing assets as per their recent strength of the price trends. This strategy is based on time frames, volatility, and volume. Some of these indicators use volumes traded to determine the momentum of stocks.
These indicators have an upper and lower reading that shows you when the trend is moving faster or slower. For instance, with a momentum indicator, a reading below -20 shows that it’s trending downwards quicker, and above 35 is trending upwards faster.
When it’s at zero, it means that the momentum is starting to go higher.
Top Tools for Identifying High Momentum Stocks
Generally, there are a number of indicators that momentum traders use to detect the right stocks. These indicators show them when to enter a position. Remember, all these traders care for is price action; therefore, they rely on technical indicators and analysis including high momentum stocks screener. Some top tools include:
- Momentum indicator: the most popular momentum tool that functions by comparing the latest closing price to the previous closing price.
- RSI: the RSI provides investors with various buy and sell signals. It is an oscillator that’s plotted on a separate chart and moves between 0 and 100. Anything below 30 is oversold, and over 70 is overbought.
- Moving averages: the MAs aren’t momentum-based, but they can help you determine whether the stock is range-bound or not. Our EMA Cloud is simple but very effective, check it ot HERE
Trading Strategies for Momentum Stocks
Generally, there are several things you have to include in your momentum investing strategy. You need to spot the right stocks and get into the right position. Make sure you stick to your plans and hold until your indicator shows you the right time to exit. But make sure you activate the stop loss on every position you enter.
Do you prefer S&P 500 or different sectors? So the first thing you should do is narrow the stocks to about the 25 biggest tech firms. To help you pick the right stocks, you must consider the fast-growing options in the last year.
When picking the right indicators, you should consider your expectations from the trade and the stocks you are targeting. Next, select the time frame depending on the volatility of the investment and the stock market.
Benefits and Risks of Trading Momentum Stocks
Momentum investing can benefit a trader with the right personality to turn huge profits. But you must learn to trade momentum stocks. And that’s because momentum trading can earn you colossal ROI over a short period. Instead of making emotional decisions, momentum traders wait for the right time to trade the best momentum stocks today.
Unfortunately, it’s time intensive, and the considerable turnover can be quite costly, especially in terms of fees.