From beginners to experts, every successful trader loves to use this key trading technique to accumulate profits with ease.
Momentum, the word is taken from Newton’s first law of motion which clearly states that objects in motion continue to stay in the same state until an external force is not applied.
In the stocks context, momentum is linked to the significant upward and downward motion of the stocks in a specific period.
The Bold Candle Momentum-based trading strategy focuses on finding the stocks which provide high directional movement on either side.
A trader with proper discipline and a decent trading system can easily spot such opportunities.
Success is achieved when the trader can buy early on the uptrend and able to short at a high price when the stock is about to show a significant downtrend.
Finding such momentum stocks is a vital part of the strategy.
If asked, an experienced momentum stock trader would say that the stock selection with adequate volatility and momentum is the biggest challenge in the whole strategy.
However, applying a screener plugged-in with a few common momentum-based strategy stock characteristics helps to reduce the number of stocks from hundreds to around a list of 10-20 stocks.
This allows the trader to focus only on high probability trades.
Below are the basic filtering criteria:
- High Liquidity: Stocks with high liquidity. Look for stocks having float within 100 million shares
- Major Breakouts: Stocks which has decisively crossed the major resistance/support levels and are trading above/below major Exponential Moving Averages
- High Volume: Relatively current higher volumes, at least double the average daily volume
- Sector Selection: Selecting stocks from the sector affected by marketing moving news. News such as the fed interest rate announcement, sectoral earnings surprises, etc.
Once we have the limited number of stocks from the screener, then we focus on candlestick patterns of each stock with the following basic criteria.
#1 Look for Bold Candlesticks that close near the higher end of the candlestick. A bold candlestick of such kind precedes the upside trend.
#2 Momentum Indicator is an oscillator to measure the speed and strength of price movement. This is the crucial factor in deciding the entry points. When the indicator crosses the zero line upward, it is a signal to buy, and when it is heading below zero, it is a signal to sell.
#3 Setting a Stop-loss on the previous High-Low is an important risk management strategy. It allows automatic sell when the stock price falls; essentially protecting one from further losses.
There are two methods of setting up the stop loss.
- For up trending stock, stop loss could be set to – Either at the Exponential Moving Average point or at the Low end of the Candle of recent Trough.
- For down trending stock, stop loss could be set to – Either at the Exponential Moving Average point or at High end of the Candle of recent Peak
Momentum trading is all about figuring out the breakouts and breakdowns beforehand. Stock selection having high volume and volatility drives the price movement.
The traders are also expected to develop fast reflexes as they are required to pay close attention to the price drivers and movements.
It is one of the evergreen trading strategies used by successful traders today.
Let me know if this strategy was helpful!