Reporting in from the bellissima city of Milan, Italy with another FREE write up for, YOU GUYS, the trading community, even though I’m on vacation just because I’m feeling that charitable! 🙂
Now that volume is starting to come into the markets again I have been bombarded with requests for my take on one of my personal favorite topics: MOMENTUM!
No matter what style you trade, long or short, micro or macro, I think we can all agree that the more momentum the better, and for good reason. We all remember the awesome runners in recent years that make any trader drool like $LFIN in which I banked $75,000 in ONE DAY, and if this winter is going to be anything like the last few years, we need to be prepared for the next cycle of insane movers!
What is Momentum?
Okay, so let’s start with the basics. What exactly IS momentum? While the definition of momentum is open to subjective interpretation depending on who you ask, if you ask me specifically there are two key components to momentum: price action and volume. In terms of price action, momentum can be bullish or bearish – or both. In terms of volume, we can compare the stock’s current volume with its average daily/weekly/monthly volume, depending on what time frame you’re using, to see if there’s any significant measurable force behind the price action. Whats awesome about momentum is that it truly is a the more the merrier situation, and we as traders will look to capitalize on the upside and the downside of the move. Gotta love gravity or in some cases lack thereof! Generally speaking, the more momentum a stock has, the better opportunities we will get.
OKAY Madaz, you must love to write or something, lets skip to the good stuff!
Okay, now that we know what momentum is, we need to know how to recognize it. Now, like I said before traders use momentum in all different styles of trading. Momentum can be gauged in many ways which is great because beginners can quickly and easily find a solution that suits them. Let’s use some examples, we can say that a stock that is breaking 52 week highs and holding its upward trend has great bullish momentum, and stocks that are at new 52 week lows are displaying very bearish momentum. We can also say that a small cap stock that opens at $2 and rips to $6 is displaying strong bullish momentum, but it may slam back down giving up most if not all of its gains, in proverbial what goes up must come down fashion, which wold be defined as strong bearish momentum.
These types of moves are typically accompanied by above average volume as stops are taken out and traders all hop on the wagon to try to take advantage of these opportunities. If a stock is trading for instance, 5x daily volume out of the blue, then you know the interest is probably there and we have a good chance there might be a play on it, provided there’s corresponding price action to go with it.
Pretty simple, right? Other traders may use indicators like the Relative Strength Index (RSI) to judge momentum, so there are a myriad of approaches we can take to spot it.
Types of Momentum
1.) Relative momentum – where the performance of different stocks in the same sector are compared against one another, where investors and traders will favor the leading movers for their respective bias.
2.) Absolute Momentum – where the performance of a stock is compared against its own performance in history.
Example of Relative Momentum
Let’s use the e-commerce as the sector. We can use $BABA and $AMZN in this example as two leading e-commerce stocks. The argument of leading momentum will be determined by a traders analysis with the winner to be in favor to investors. Here’s a chart.
As we can easily see, from a bullish standpoint we can spot that $AMZN is the clear winner here having powerful bullish momentum. Or, if we were short biased we would favor $BABA as we can easily spot a down trending stock at lows, displaying bearish momentum.
Example of Absolute Momentum
We can use $AMZN again for this example, looking at a 3 year chart comparing its previous years to the current year. The argument of which year is leading in momentum is to be favored. Lets look at another chart example
Here we can see that from the start of the chart in 2015, $AMZN was mostly in a range bound state, and leading into November of 2016, the company broke out of that range on an upward ascension, making the argument that in 2016, the stock had more bullish momentum than in 2015!
How Madaz Spots Momentum
So now what we know what momentum is and also how to spot it, let’s talk about how I use it in my trading. As many of you know I LOVE fast moving small cap stocks. Over the years I’ve also made money in things like $UVXY and other large caps, but my main focus is small caps and there’s no question why. Low float small caps offer traders HUGE opportunities in momentum and range almost daily, and this market is a testament to that! I personally love a good rip above premarket highs to show me that there’s bullish momentum, or a nice yank below the opening lows to show me that the stock is weak and has bearish momentum..short on pops baby! Volume indicates interest in a stock so when a stock is trading well above the volume it trades on average, you’re more often than not, going to find some opportunities on it.
Tools YOU Need to Be the First to Hop on the MOMO Train
Now, where do I find stocks that are moving? As you guys know, I love to use scanners and a news feed/squawk box to find what stocks are moving at that very moment, and the alert them to me so I don’t have to hunt and possibly miss opportunities. If a stock is ripping on news, we want to know about it as quickly as possible to play my favorite washout long or panic pop short, and that’s where these tools come in. I have even done one better for you guys and have made a video on how I set up my Trade-Ideas scanner, where you can learn to tailor volume criteria to find stocks that are suitable to your trading style. Yes, while it does cost money to have these tools but when it comes down to a few bucks a month in exchange for finding out these plays before the crowd, it’s well worth it, believe me.
Alright guys, I hope you enjoyed this quick informative blog on MOMENTUM trading! Hopefully we get a ton of it coming our way this winter so everyone can reach epic new highs on their accounts using principals in the #NoBlowUpChallenge. Now you know why its useful, how to spot it, and where to find it!
Please LIKE, SHARE, and COMMENT below to let me know what topic to cover next.
Have a great week and let’s all catch that MOMO train together!
Side Note: I will also be speaking at the Trade-Ideas Summit too, if you’re going to be there give me a holler!
Buona Notte! (It’s 10PM over here as I post this!)
Tired of never having shares to short? Does your broker just plain suck?Madaz recommends Centerpoint Securities as the preferred broker.
Tired of getting late alerts and getting dumped on by your guru?Madaz recommends Trade-Ideas as the preferred stock scanner.
Are you often missing big moves because it takes you forever to find out the catalyst?Madaz recommends Benzinga Pro as the preferred Live News Feed service.
Affiliate Disclosure: I know what you're thinking. Madaz, ya sneaky bastard, trying to sneak in some affiliate links. Any compensation I may receive from this will pay for big macs on days where the market isn't feeling so charitable. For a more complete version of this mumbo jumbo, please click here.