Power of Momentum Trading

In this blog, I will answer the question what kind of a trader I am and what I look at to define Momentum. In short, I am a momentum trader. No kidding right?   -seeing how my team and I decided to build MOMO...

I trade short-term as well as longer term momentum. While intraday trading, I mostly use raw intraday velocity via the MOMO stream, I also use Momentum and Unusual Volume to set my sights for the day ahead.

For longer term momentum swings, I use commonly use News, MOMO Squeeze, Momentum (a MOMO indicator) and zoom out in Discovery timeframes to identify my targets.  I also use themes heavily as they ebb and flow in "sub-waves" within the macro climate.  Examples of these themes are; EV's, Alt energy, Payments, Semis, SaaS, and CyberSecurity. MOMO Alerts also play well here as they help keep me honest on the moves.  

What is Momentum?
Some say there are multiple definitions of Momentum. I'm not so sure about that.  For me, Momentum simply means consistency in direction over given duration.   It's effectively inertia - what is in motion, stays in motion. For the stock market and today's climate it behaves a bit differently and could be defined as directional inertia increasing at an increasing rate.  Social media, FOMO and sheer popularity of trading have accelerated momentum to the work more like the latter.  Either definition plays nicely with my strategy and MOMO.  

How to Measure Momentum?
Almost everyone I know is looking for Momentum stocks.  While there are a million ways to measure it,  I stick to the following indicators.  Why?  Well, most of the other indicators are noise or derivatives of the these indicators and definitely not a fan of chasing new indicators to unnecessarily force fit.

So I think the following are the premier ways to evaluate Momentum:

  • New highs / New lows - Intraday new higher-highs and new lower-lows  (and MOMO Momentum which uses this in its algorithm).  
  • Trends -  Longer term trend lines to validate directional bias
  • VWAP Dist - Where in the demand/supply-side does the stock currently sit.
  • Unusual Volume - Signifies interest and can be leading indicator ahead of a move.  Usually obvious when a big move occurs that volume will be atypical.
  • Squeeze (Anti-Momentum?) - New potential or awakening opportunity. Great with unusual volume.  
  • Rate of change - This is a no-brainer, but without volume a bit of base and other information it lacks context.  
  • Popularity - Good for helping find stocks I have possibly been ignoring, but potentially also played out.  


  • RSI - Not a bad indicator, but often feels like a "Captain Obvious" indicator.  
  • Supply & Demand Zones - These help keep you honest and prevent you from buying into headwinds.  
  • Gap ups/downs - creates excitement and potential audience.  Always feel like checking my back in a dark alley with this though.

If you want to continue reading on, you can get my commentary on a few of the select points on why I like the indicators mentioned above.

New Highs (and New Lows):
Nothing makes momentum traders (all traders?) more excited than when an asset makes a new High. This is one of my favorite indicators to measure momentum. And if I am measuring momentum on the downside, I simply flip from HIGH to LOW.  While I'm primarly a long trader, I do use the lows to find stocks I like that are exhausted and buy the dip.  

I've blogged about this several times in the past, but a new high and new low is significant in that the stock is achieving a period of price discovery, piercing the near term stops, and also the point of FOMO where other traders are becoming dialed into the action.

New highs and lows are also a great source of identifying those themes which are "en vogue".  If you don't over-filter the MOMO Stream and enable all the categories you can see which stocks and corresponding markets are hitting.  It may seem intimidating at first, but the Stream is great for this. (Many of you want to highly control your categories, price range, etc. but this puts blinders on.)

52wk New Highs / Lows
These are the big brother of daily highs and lows.  The 52 week High/Low is a powerful momentum indicator. Many funds, ETFs, and large traders routinely have programmatic buying that scans for new 52 week highs and buys into those. This gives a natural tailwind to these names. These are also often newsworthy events which fuel longer term momentum.  

Momentum Trades Differently
Let us say you have bought a stock which has not gone anywhere for 5 years. It just means no one cares about it (for now). Your risk from a sudden move down , while there, is quite small. Value traders know what I am talking about, not a huge risk to immediate losses.

However, the market is not very forgiving when you buy something making new 52 week highs, an asset that is already up 50, 100, or 200 %. Your room for error is  small. For these kinds of plays, I will have a mental stop right under 20-22% off the highs.  Let's say I get in on NET at 115 right when it makes a new 52 week high. I will risk in this case around $15 and my LIS will be around $95-100. As for price targets, a minimum 20 to 30% is a given . Once I get there, I will re-assess based on several factors - including speed of move, related symbols, and general market conditions.

Optionally, I may take off a portion of the position and let the remaining run.  This may be with a trailing stop or a stop at slightly above break-even depending on sentiment. There is no one size fits all.  However, suffice it to say for all of these trades, my risk is a  25% MAX.  No tolerance here for anything more than that.

Gap up  &  Gap down
A gap up simply means there was no market where the gap happened. There was no one willing to sell in the gap, if this was a gap up. And no one willing to buy, if it was a gap down. By nature of the markets, this can be very bullish if gap up or very bearish (gap downs).

Many people, (myself included),  when a stock makes a gap up rush to sell it, they assume it's gonna fill the gap, even though it may eventually fill the gap after days or weeks or months or even years.  Remember, I like the belly of the trade and if I get my gains, I can move on and not have to worry about the hype of the gap.

Many gaps are tricky.  I think an equal number of people short gaps that try and long them and the longs don't have the commitment of a typical New high/Low scenario.  As such, MOMO will show these moves as large % gains and such, but in my minds need to gain the base strength in order to gain "Momentum validation".

Also, If I do trade a gap, it usually is short term.  For me, a gap either up or down plays like a halt.  Its a lottery ticket and not my ideal trade.

"The trend is your friend" or so says the rather lame adage.  Trends are great validators for finding breaks in momentum over time.  You can't really scan trendlines to see which stock is up or down, but it is part of my process in validating where a stock is and determining if it is over extended, in consolidation, or just a near-term blip.  So trends come in after I uncover the move on MOMO and get a feel for where the trade is.  Also, they help me identify stops and likely tops.  For me I use weekly and even monthly trends to help identify degrees of bullishneess/bearishness.

The VWAP is bit of a guiding light.  It's not right or wrong, but lets you know where the market has been accumulating or selling.  If I'm doing my things right, I'm ahead of the VWAP game, but I do like to know that trades are over-extended on the daily and VWAPdist keeps me honest.

Many patterns are a challenge to identify depending on where they fit on the timeframe and how to align to your strategy.  But while we researched various candidates to be able to scan a market for potential momentum plays Squeeze stood out - and it makes the most sense to us.  We are firm believers in stocks rotating in and out of momentum and being able to scan for those most ripe for a break has changed my view.  MOMO Squeeze lets you find stocks that are overdue for a move as well as those currently moving out consolidation into a new phase.  And while in a Squeeze pattern a stock is clearly not in Momentum

Its easy to get caught up in the stocks with hype.  Whether socially trending or a "Popular" stock you can get winners, but also caught after the fact.  Momentum requires continued interest and seeing stocks with this velocity after your entry can be confirming.  Also using tools helps learn from what others are trading.  These entries are usually fleeting and stocks with hype fall as quickly as they rise.

What about targets and stops?
My targets are relatively tight - in my mind. Because momentum is a double-edged sword, and I do not want to be caught on the wrong side of it.  My general philosophy is to get the "belly of the trade".  MOMO gets me the entries sooner which helps me have more leeway on runners, but when Momentum starts to turn usually on a 4 hour timeframe to 2 days.  I usually close the position.  I've done this because more times than not I miss out on continued gains and while the day I close is usually down I have confirmed that Momentum is waining.  It may jump another 10 or 20%, but if things went well I've made 40% or more.  

That is all for this post.  Expecting we get a bounce by Wednesday of this week.  The risk/reward to upside is getting very attractive.  If it doesn't catch we are in for a bumpy ride for some time.

Looking for a way to find momentum breakouts?  Give MOMO Pro a try.  Visit Mometic.com for details.

// Profit from Momentum