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Momentum Day Trading Strategy: Stocks

The document discusses the momentum day trading strategy. Momentum traders look for stocks moving 20-30% or more each day. These momentum stocks have low float (under 100 million shares), are trading above moving averages with no resistance, have high relative volume of at least 2x the average, and often have a fundamental catalyst. Two common patterns are bull flags, where the stock forms tall candles followed by a pullback, and flat top breakouts, where resistance forms a flat top pattern before a breakout. The best time to trade is in the morning, especially the first hour, though news spikes can occur anytime. The entry criteria include identifying these patterns, having a tight stop, high relative volume, and low float. Ex

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3K views3 pages

Momentum Day Trading Strategy: Stocks

The document discusses the momentum day trading strategy. Momentum traders look for stocks moving 20-30% or more each day. These momentum stocks have low float (under 100 million shares), are trading above moving averages with no resistance, have high relative volume of at least 2x the average, and often have a fundamental catalyst. Two common patterns are bull flags, where the stock forms tall candles followed by a pullback, and flat top breakouts, where resistance forms a flat top pattern before a breakout. The best time to trade is in the morning, especially the first hour, though news spikes can occur anytime. The entry criteria include identifying these patterns, having a tight stop, high relative volume, and low float. Ex

Uploaded by

maruthi631
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Momentum Day Trading Strategy

Momentum is what day trading is all about.  One of the first things I learned as a beginner trader is that the only way
to profit is by finding stocks that are moving.  The good news is that almost every single day there is a stock that
will move 20-30% or even more!  This is a fact.

Day Trading Strategies & The Anatomy of Momentum Stocks


Momentum stocks all have a few things in common.  If we scan 5000 stocks asking for only the following criteria to
be true, we’ll often have a list of less than 10 stocks each day.  These are the stocks that have the potential to move
20-30%.  These are the stocks I trade to make a living as a trader.
Criteria #1: Float of under 100mil shares
Criteria #2: Strong Daily Charts (above the Moving Averages and with no nearby resistance).
Criteria #3: High Relative Volume of at least 2x above average. (This compares the current volume for today to the
average volume for this time of day.  These all refer to the standard volume numbers, which are reset every night at
midnight.)
Criteria #4: A fundamental catalyst such as a PR, Earnings, FDA Announcement, Activist Investors or some other
kind of breaking news.  Stocks can also experience momentum without a fundamental catalyst.  When this happens,
it’s called a technical breakout.
With the Bull Flag Pattern, my entry is the first candle to make a new high after the breakout.  So we can scan for
the stocks squeezing up, forming the tall green candles of the Bull Flag, then wait for 2-3 red candles to form a
pullback.
The first green candle to make a new high after the pullback is my entry, with my stop at the low of the pullback. 
Typically we’ll see volume spike at the moment the first candle makes a new high.  That is the tens of thousands of
retail traders taking positions and sending their buying orders.

The flat top breakout pattern is similar to the bull flag pattern except the pullback typically has, as the name implies,
a flat top where there is a strong level of resistance. This usually happens over a period of a few candles and will be
easy to recognize on a chart by the obvious flat top pattern.
This pattern usually forms because there is a big seller or sellers at a specific price level which will require buyers to
buy up all the shares before prices can continuing higher. This type of pattern can result in a explosive breakout
because when short sellers notice this resistance level forming they will put a stop order just above it.
When buyers take the resistance level out, all the buy stop orders will then be triggered causing the stock to shoot up
very quickly and the longs will be sitting on some nice profits when it does!

The Best Time of Day to Trade


The Momentum Trading Strategies can be used from 9:30-4pm but I find the mornings are almost always the best
time to trade, specifically the first hour the market is open.  I focus my trading from 9:30am – 11:30am.  However,
at any time during the day we can get a news spike that will suddenly bring a tremendous amount of volume into a
stock.
This stock which was of no interest earlier in the day is now a good candidate to trade on the first pull back.  The
first pull back will typically take the form of a bull flag.  After 11:30am I prefer to only trade off the 5-min chart. 
The 1-min chart becomes too choppy in the mid-day and afternoon trading hours.

Entry Checklist Summary


Entry Criteria #1: Momentum Day Trading Chart Pattern (Bull Flag or Flat Top Breakout)
Entry Criteria #2: You have a tight stop that supports a 2:1 profit loss ratio
Entry Criteria #3: You have high relative volume (2x or higher) and ideally associated with a catalyst.  Heavier
volume means more people are watching.
Entry Criteria #4: Low Float is preferred.  I look for under 100mil shares, but under 20million shares is ideal.  You
can find the outstanding float with Trade Ideas or eSignal.

Exit Indicators
Exit Indicator #1: I will sell 1/2 when I hit my first profit target.  If I’m risking $100 to make $200, once I’m up
$200 I’ll sell 1/2.  I then adjust my stop to my entry price on the balance of my position
Exit Indicator #2: If I haven’t already sold 1/2, the first candle to close red is an exit indicator.  If I’ve already sold
1/2, I’ll hold through red candles as long as my breakeven stop doesn’t hit.
Exit Indicator #3: Extension bar forces me to begin locking in my profits before the inevitable reversal begins.  An
extension bar is a candle that spikes up and instantly put me up $2-400 or even more.  When I’m lucky enough to
have a stock spike up while I’m holding, I sell into the spike.

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