- July 7, 2025
- Posted by: Shane Daly
- Categories: Stock Trading, Trading Article
You’ve noticed that there are some stocks, regardless of news or market conditions, that seem to defy gravity, soaring higher day after day while others range. As a momentum trader myself, I can tell you there’s more to catching these rockets than just buying what’s hot. While price action drives these opportunities, you’ll need to master specific indicators, timing techniques, and risk management strategies to consistently profit from momentum. Let’s uncover what separates successful momentum traders from the crowd.
TLDR
- Identify stocks showing at least 25% price movement within months, combined with consistent daily trading volume above 100,000 shares.
- Monitor RSI readings above 70 and MACD crossovers to confirm strong upward trends and potential entry points.
- Look for healthy price consolidation periods after dramatic increases, indicating sustainable momentum rather than temporary spikes.
- Implement strict position sizing and stop-loss orders to protect against sudden reversals in momentum stocks.
- Study volume patterns during breakouts to validate price movements and confirm genuine momentum versus false signals.
What Makes a Stock a Momentum Play
Three key characteristics define a true momentum stock: significant price movement, consistent trading volume, and directional volatility.
When you’re looking for momentum catalysts, you’ll want to see dramatic price increases, often 25% or more within a few months, followed by healthy price consolidation periods.
I’ve found that the best momentum plays show sustained upward trends rather than erratic swings.
You’ll recognize these stocks by their steady trading volume above 100K shares daily and their ability to maintain upward momentum even after brief pullbacks, creating ideal entry points for traders like you.
Understand Momentum Trading
Momentum trading is a strategy traders use to identify and profit from stocks showing strong price movements, either up or down. Traders who use this approach aim to buy stocks that have made significant upward price jumps (or are likely to), or sell stocks that have experienced substantial price declines.
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.
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
When evaluating momentum stocks, volatility plays a vital role. A stock with high volatility will experience rapid price movements up and down, presenting opportunities for quick profits if traded strategically. The key is to find directional volatility, as trading instruments with erratic, whipsaw movements often leads to devastating results.
When selecting a stock for momentum trading, liquidity is needed as it enables quick entry and exit of positions without impacting the stock’s market price. While trading momentum, slippage may occur, causing you to receive a less favorable price than anticipated. However, most retail traders’ orders won’t affect an instrument’s price unless they’re trading thinly-traded stocks.
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 demands a specific set of procedures to follow. Having a systematic approach is important for identifying and selecting potential stocks suitable for momentum trading.
Time Frame
Momentum trading can be applied to any time frame, though each comes with its own advantages and disadvantages. A momentum trade using a 15-minute chart will behave differently than one using a daily time frame. On lower time frame charts, momentum patterns and their pauses are more noticeable. These clear pauses might cause a trader to exit their position, even though the momentum may still be strong when viewed on 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.
| Criteria | Condition |
|---|---|
| Price | Above $3.00 |
| Volume | Greater than 100K (or 200K, depending on the scan) |
| ADR | 5% or higher (ATR% can be used) |
| Performance | Weekly, 1, 3, 6 months (or Month +50%) |
| Sort | By performance or performance quarter |
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
When trading with momentum, liquidity is important since you need to buy shares quickly. Low liquidity leads to wider spreads between bid and ask prices, which can result in costly slippage when entering or exiting positions. To make better stock selections, focus on those with high daily trading volumes, ensuring there are enough buyers and sellers available when needed. This approach will help your orders fill more efficiently without significantly impacting 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.
Market Psychology and Momentum Trading
When you’re tracking momentum stocks, understanding market psychology becomes your secret weapon for anticipating price movements and trader behavior. Market sentiment shifts quickly, and I’ve seen how psychological triggers can create self-fulfilling prophecies in trading patterns.
- Fear of missing out (FOMO) drives traders to chase momentum stocks higher, creating accelerated upward price movement.
- Greed and panic often alternate during momentum runs, causing predictable overreactions in both directions.
- Mass psychology tends to amplify trends as traders follow the crowd, making breakouts more powerful.
Watch these emotional patterns carefully, and you’ll spot momentum opportunities before others do.
Your Questions Answered
How Do International Market Hours Affect Momentum Trading Strategies?
You’ll find that international trading hours significantly impact your momentum strategies through market overlap periods, when volatility spikes often occur.
During these crossovers, forex impact and news leaks from different time zones can create powerful price movements.
I’ve noticed overnight moves frequently trigger momentum opportunities, especially when Asian markets influence U.S. pre-market activity, so you’ll want to monitor these transitions carefully.
Can Momentum Trading Be Effectively Combined With Dividend Investing?
While you can combine momentum trading with dividend investing, you’ll need to focus on finding the right momentum overlap – stocks that show both strong price movement and reliable dividend yield.
I’ve found that some high-dividend sectors, like utilities and REITs, typically move too slowly for momentum strategies.
You’re better off maintaining separate portfolios: one for momentum plays and another for dividend-generating investments.
What Role Do ETFS Play in Dampening or Amplifying Stock Momentum?
ETFs can both dampen and amplify stock momentum, depending on their composition and trading volume.
When you’re tracking sector-specific ETFs, they’ll often magnify momentum effects as institutional investors pile into trending sectors.
However, broad-market ETFs typically reduce individual stock momentum through ETF diversification.
I’ve noticed that heavily-traded ETFs can create their own momentum patterns, which you’ll see ripple through their underlying holdings.
How Does Company Insider Trading Activity Influence Momentum Stock Selection?
When you’re screening for momentum stocks, insider trading activity can serve as a valuable sentiment indicator.
I’ve found that significant insider buying often signals strong confidence in the company’s path, which can precede or reinforce momentum trends.
You’ll want to watch for clusters of insider purchases and increased trading volume, as these patterns suggest internal optimism about the stock’s future performance and can validate your momentum trading thesis.
Should Momentum Traders Adjust Their Strategies During Earnings Season Differently?
You’ll want to adapt your momentum trading strategy during earnings season, as volatility spikes can create both opportunities and risks.
I’d recommend reducing position sizes by 30-50% when trading around earnings announcements, since earnings surprises can trigger unpredictable price movements.
Consider waiting for the market to digest earnings news before entering trades, and pay closer attention to pre-market and after-hours trading patterns.
Conclusion
You’ve now got the essential tools to tackle momentum trading, from technical indicators to psychological perspectives. Remember, it’s not just about following trends – you’ll need to combine disciplined analysis with smart risk management to succeed. As you develop your strategy, stay focused on volume patterns, price action, and market sentiment. When you’re ready, start small and let your knowledge grow with each calculated trade.
