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Step by Step Guide for Trading Momentum Stocks for Beginners

Looking to trade momentum stocks, but don't know how or where to start? Check out this step by step guide for trading momentum stocks for beginners.

By C.C. CurtisPublished 6 years ago 5 min read
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When you’re investing in momentum stocks, you’re buying stocks or other securities that possessed high returns through the last three to twelve months. Also, selling those would have poor returns over the same period. It’s an investment strategy that aims to capitalize on the continuance of present trends in the market. And to be part in the investing, a trader takes a long position in an asset that shows an upward trending price or the trader short-sells the security that was in a downtrend.

So, the entire concept is that once a trend is established, there’s a high chance that it will continue in that direction than to move against the trend. If you want to know more about trading momentum stocks, follow this guide in trading momentum stocks for beginners.

Daily Chart Breakouts

For starters, daily chart breakouts are ideal daily context to play for momentum plays. While the bias is clear, it’s fairly easy to clarify your risk and there is usually a greater risk versus a reward. As for new traders, it is much easier for the majority to play setups that are joining an existing trend.

In this, you’re focusing on looking for long periods of consolidation right before playing a breakout. And the longer a stock is trading within a range, the stronger the move will be once it breaks a major resistance or support.

Daily Chart Breakdowns

Next, from the guide to trading momentum stocks for beginners, daily chart breakdowns are basically the same strategies as playing a breakout. The only difference is that it’s the downside. Here, what you’re mainly focusing on is looking for breakdowns of daily support for momentum to the downside.

You need to notice which stocks have a major breakdown and what range has it been consolidating within how many months. This is exactly what you would want to see for a breakdown play.

Intraday Pullbacks

Intraday pullbacks are part of the method in trading momentum stocks for beginners. To let you be aware, momentum stocks don’t go straight up forever. It’s very easy to get fear of missing out (FOMO) once you see a stock making big moves without you.

So, always remember that you will almost definitely get a pullback at some point. You should use moving averages as well as price support/resistance to help you manage your risk.

Breakouts of Long Periods of Consolidation Intraday

Among the guide to trading momentum stocks for beginners, breakouts of long periods of consolidation intraday play a major role. Stocks usually get their power and explosiveness through long periods of consolidation in a tight range.

While waiting for a stock to pull back and consolidate for a couple of minutes or more, this will actually give you a better risk compared to rewards for your trades. And once the stock completely breaks out of the range, it will most likely have something great follow through.

Criteria for a Momentum Stock

These are the standards for a momentum stock. Since a momentum stock is literally always a stock that has made large moves in the past, you want to view on the daily chart a history of following through as well as holding gains. You also don’t want to be part of stocks that have no range at all.

For the clean daily chart, the stock shouldn’t have any areas of resistance to the left if you’ve been looking for a while. And there isn’t any support if you’re looking short. You also don’t want to search for momentum in illiquid stocks. If you do, you’ll most likely get very little follow through, and you’ll gain a lot of slippage on your exits. While the majority of momentum stocks are moving, it’s from a fundamental catalyst. Since the best catalyst is a quarterly earnings report, the other catalysts like FDA approvals and analysts upgrades can get stocks moving, too.

Times of Day for Momentum

Believe it or not, there are times of the day where it’s best to play momentum stocks. The ideal times during a day are usually the first hour of 9:30 to 10:30. Within this time, all of the patterns will tend to resolve the greatest and have follow through.

After 10:30, the volume immediately dies down tremendously and the stocks start to be a lot more choppy. As for a midday news catalyst, this will most likely bring some volume back into a stock and offer some range as well as patterns to play off of.

Align Setups on Multiple Time Frames

Always align your setups on multiple time frames, as it’s part of the guide to trading momentum stocks for beginners. You want to make sure that a daily breakout is accompanied with an intraday breakout. This will maximize your probability of your trade following through. While the daily of the stock will show you what the macro trend is, the intraday will show you the micro trend.

There are times when it’s useful to look at a weekly or monthly chart to see an even greater picture of the trend. Also, the more time frames you can discover a breakout or breakdown, the better!

Weakness nor Strength

Momentum stocks are most likely moving about five to ten percent or possibly more in a space of hours. While they have massive intraday ranges, it’s easier to get underwater faster if you’re chasing these stocks blindly.

Also, how far a stock is trading from its moving averages is a better method to see whether or not it’s extended. However, if it’s trading far away from its moving averages, then this is considered to be extended. If it’s trading near or on them, then it’s seen to have pulled back. To do this right, it’s better to wait for momentum stocks to pull back and consolidate from their moving averages or price support/resistance for a little before moving into for the next push.

Stocks' Float, Sector, and Catalyst

Lastly, from the guide to trading momentum stocks for beginners, you don’t entirely need to move through every one of SEC filing within the past month of the stocks you day trade. However, you should be aware of the fundamental characteristics—float, sector, and catalyst. For a float, a stock’s float will tell you its potential for an explosive move. Also, a float stock which is about 100 million shares or below is usually to make a large move rather than a stock with a larger float.

As for stocks in specific sectors, they’re not great for day trading, and other sectors are actually better for it. As an example, retail stocks are normally slow when moving and they don’t have much range. For biotech stocks, this contrasts trend to have big ranges and make major moves.

In addition, you should understand why a stock is gapping up or down right before the stock market opens. It’s known that some catalysts won’t make any momentum. A great example for this is that a buyout can result in a gap up, however, the stock can only trade flat for the entire day. If a stock gaps on earnings, then it will most likely offer a few great momentum and range to profit from that day.

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About the Creator

C.C. Curtis

Enjoys lounging in NYC bars, loves traveling to foreign countries, and volunteers at the homeless shelter twice a month.

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