How to Find Perfect Momentum Stocks

To find momentum stocks, utilize a reliable stock screening tool that allows filtering based on key criteria such as price momentum, volume, and relative strength. Look for stocks with upward price trends, increasing trading volumes, and strong relative performance. Combining technical indicators with fundamental analysis is another way to find momentum stocks.

Are you looking to increase your trading success? Momentum trading may be the answer. By learning how to choose the right stocks for momentum trading, you can leverage trends, and strong price movements, and capitalize on short-term gains.

This post provides an overview of the characteristics that make a stock suitable for momentum trading, as well as helpful advice on locating and successfully executing trades.

From day traders to swing traders, all traders can take advantage of finding momentum stocks and profiting from them.

Understand Momentum Trading

Momentum trading is a strategy used by traders to identify and capitalize on stocks that are showing strong upward or downward price movements. This strategy is used by traders who want to buy stocks that have had a big jump in price (or about to), or those who want to sell stocks that have dropped significantly.

The idea behind momentum trading is to take advantage of the stock’s current trend and the second leg in a trending move.  You can do these either through day trading or swing trading.

What Makes a Stock Ideal for Momentum Trading?

When looking for potential momentum trades, traders should focus on stocks that show high levels of volatility and liquidity. Volatility indicates how much the stock has been moving up or down over time; higher volatility usually means bigger moves and more opportunities for profits from momentum trades.

Liquidity refers to how easily you can buy or sell shares without affecting the overall market or your prices to exit/enter — higher liquidity typically means less slippage (price difference between when you enter and exit your trade).

Stocks with higher volume tend to be more liquid than those with lower volume, so they’re often better suited for momentum trading strategies.

How To Choose the Right Stocks?

Traders skilled in recognizing stock movements and trends can use momentum trading as a potent technique to profit in trading. With that knowledge, it becomes easier to determine which stocks are best suited for momentum trading strategies.

Every day, there are stocks showing setups, both in day trading and swing trading, that can be candidates for momentum trades.  Choosing the right stocks can be as simple as looking for a big move in price, a consolidation, and then a resumption of the trend move.

What Makes a Stock Ideal for Momentum Trading

If you want to trade momentum stocks, those that display significant price movement over a short period of time are worth considering.

An important factor is the price action of the stock.

In this example, the price made a big move to the upside with a 105% price gain.  After a run in price, stocks tend to consolidate as we see in the middle of the chart.  Inside the range, this is clean price action, orderly, and then the price begins to base just under resistance.  This is bullish.

Tip:  We do not want to see strong momentum in the opposite direction of the uptrend.

Price breaks out of the range into a 63% increase for the second leg of the move.

Volatility and Liquidity

Volatility is a key characteristic when looking at momentum stocks. A volatile stock will move up and down quickly, creating opportunities for quick gains if traded correctly. We want the volatility to be directional and trading an instrument that has whipsaw volatility is a recipe for disaster.

Liquidity is also essential when selecting a stock for momentum trading because it allows you to enter and exit positions quickly without affecting the market price of the stock. Slippage can occur when trading momentum and you may get filled at a worse price than you expected.  Most retail traders won’t move the instrument with their orders unless trading a thin stock.

Stocks with high liquidity tend to have tight spreads between the bid and ask prices which makes them attractive to traders.  This allows for faster execution when placing and getting filled with your trades.

This stock had a 64% move in price after a breakout.  Price begins to consolidate in a sideways range and then breaks 56% to the upside to highs.

Technical indicators such as moving averages (MA) can help identify trends and the state of price (trending/consolidation). Technical analysis can help you with decisions about where entry and exit points should be placed as well as what strategies may yield better returns given current market conditions.

To add some objective measures to trading, look for the price to move into a 10, 20, 50 period moving average as seen above.  This is a good technique to show some time value to the length of the consolidation.  Longer bases tend to have larger second moves than shorter bases.

To find momentum stocks, look for a strong price trend and good liquidity, which are both essential elements for momentum trading. Once you have determined the features of a stock suitable for your momentum trading strategy, you need to narrow down your list of candidates to trade.

How To Choose the Right Stocks

Trading momentum stocks requires a specific routine to follow.

It is essential to have a method in place that can aid you in recognizing and picking out potential stocks for momentum trading.

What Is Your Time Frame

All time frames can be used for momentum trading but all come with pros and cons.  An intra-day momentum trade-off of a 15-minute chart will react differently than one from a daily time frame.  Momentum can persist and pauses are more obvious on the lower time frame charts.  These obvious pauses may have a trader exiting their position while the momentum is still evident on the daily charts

Analyze Trends

The most successful traders pay close attention to trends/price action and use them as an indicator of what stocks may be poised for big moves. Traders who are successful will utilize chart patterns, and technical indicators (e.g., support/resistance levels, moving averages, volume analysis, and RSI), to understand the stock’s movement that may be suitable for a momentum trading setup.

In the charts above, notice we used a significant move in price and then a pause to zero in on the stocks that could be setting up a big second move.  A large price move can be anything 25% and greater.

Set Up Momentum Scans

These do not have to be complicated in order to find stocks setting up for a potential momentum move.

Using that scan, we get a selection of stocks that we can analyze using whatever criteria are used for a trade setup.

Look at Fundamentals

While analyzing trends is important for short-term trades, some traders will look at the fundamentals of each stock before making any decisions. Examine the financials of each stock, such as the rate of profit increase, debt-equity ratio, P/E value, and DY%, to get an idea if it is a good long-term investment.

I don’t focus on company fundamentals.

Focus on Liquidity

Momentum trading requires buying shares quickly so liquidity is key; low liquidity means higher spreads between bid/ask prices which can cost you money due to slippage when entering or exiting positions. When choosing stocks focus on those with high daily volumes so that there are enough buyers/sellers available when needed — this way your orders will fill more easily without having too much impact on price movements.

Due to my position size, I can trade stocks with lower volume such as 300K and up.  Larger players will want to consider 1 million shares and up so their orders do not push the stock price.

Taking advantage of news releases and leveraging social media sentiment analysis can give traders an edge. We saw that with Gamestop and AMC where traders took advantage of the large and fast moves that occurred due to social media.

FAQs

How do you choose stocks for momentum trading?

Momentum trading involves identifying stocks that have a strong upward or downward trend. To choose stocks for momentum trading, traders should look for stocks with volume at least +100K, above $3.00, a big move up (+25 – 100% in the last few months), and current consolidation.

Which are the best momentum stocks?

Momentum stocks are those that have experienced a significant increase in price over a short period of time. These stocks may be more unpredictable than other investments, so they can provide higher yields yet also come with a heightened risk of sudden reversal.  Stocks that are forming ascending triangles after large moves in price can make ideal candidates.

Conclusion

When it comes to trading momentum stocks, the key is to choose the right stocks. With a thorough understanding of what makes a stock ideal for momentum trading and how to identify it using scanners, traders can make informed decisions when selecting their trades.

Day and swing traders alike can benefit from this strategy if they are able to select high-momentum stocks that meet their criteria.

So remember: do your research, set realistic expectations, and always choose the right stocks for momentum trading.