A Successful Momentum Trading Strategy

This year tens of thousands of Americans will take on the daunting task of learning to day trade. Only 10% will make money in his or her first year and only 1% will be able to make a living trading stocks. What separates the winners from the losers? All successful traders have learned through failures to follow a strict and simple strategy. Without a trading strategy you have little hope of becoming one of the few that consistently pull money out of the markets.

For a beginner trader there is a steep learning curve to understanding the technology, terminology, and software for trading. Expecting a new trader to also create his or her own trading strategy is not realistic. My friend Ross Cameron teaches a Momentum Trading Strategy at Warrior Trading. He focuses on finding low risk entries on strong stocks which is one of the best strategies for new traders.

A Jack Of All Trades And A Master Of None

In the stock market there is always another trader out there who is a little bit better and a little bit smarter than you. If you try to be a jack of all trades and learn a little bit about a dozen different strategies you are destined to fail. You must master one strategy at a time, and only add additional strategies once you have proven success with the first ones. It is very common for new traders to jump from one strategy to another because they get inpatient when they don’t find immediate success.

Learning to maintain patience and come back from frustrating days in the market ready is a common characteristic among all successful traders. Henry Ford once said “Failure is simply the opportunity to begin again, this time more intelligently”. Success didn’t come easily for most of the traders I know. In contrast, it was the result of years of studying patterns, analyzing mistakes, and adapting to changing markets. The best traders I know all experienced getting knocked down in the markets but got back up ready to work even harder.

3 Steps To A Successful Momentum Trading Strategy

Momentum Trading Strategy

Momentum Trading is one of the most popular strategies. Momentum stocks typically have released news and are trading on higher than average volume because retail traders and institutional trades alike want a piece of the action. Retail traders love momentum stocks because they commonly known to be some of the easiest stocks to trade each day. The markets can be very choppy. Making irrationally moves up and down but without a well-defined trend. Stocks that trend nicely usually have a good catalyst. These catalysts become the creators of momentum.

Step 1: Find the Momentum

As traders we hunt first for the beginning signs of momentum. We use tools like Strategy Scanners built by Trade-Ideas. These stock scanners can be customized to show us stocks trading on above average volume or experiencing big percentage gains. I often begin running scans at 8:30am before the markets are officially open to see if any stocks are indicating that they will open higher. When a stock opens higher than it closed in the previous session this is called a Gap. Gaps in the chart are almost always the result of news.

Step 2: Identify The Catalyst

Once we have found a stock that is experiencing momentum we can begin hunting for the reason. Some traders focus strictly on the price action and disregard the fundamental reasons for the move. I like to know the news because I’ve found certain types of news cause particularly strong momentum. I like stocks that have just reported a big earnings beat or have issued a press release regarding new business acquisitions or new sales. I also really like trading biotech and pharmaceutical stocks on clinical trials results and FDA approvals. I tend to avoid catalysts such as an analyst putting out an upgraded price target or a journalist writing a positive article on the company. These lower quality catalysts typically result in lower volume momentum.

Step 3: Find A Setup

Once I have found a stock that is moving and properly identified the catalyst I can begin looking for a setup. A setup is an opportunity to buy the stock with low risk and high reward potential. One of the most common setups are called Flags. A Flag forms when a stock makes a very quick move up and then starts consolidating sideways. The move up represents the flag pole and the sideways consolidation represents the flag. When I buy a Flag I set my stop loss at the bottom of the pull back. I set my profit target just above the top of the flag. I look to get an initial position started and then add to that position if the stock continues trending up. Some of my biggest winning trades have been simple flag breakouts on a momentum stock.

Become A Master Momentum Trader

Momentum Trading is a very popular strategy because momentum is relatively easy to find. Almost every day all professional traders will congregate around a small handful of stocks experiencing momentum. This results in that small handful of stocks trading on extremely high volume. The higher the volume the easier it is to quickly move in and out of positions. Additionally, as more retail traders are watching these stocks the likelihood of flag patterns resolving in the anticipated direction increases because so many traders buy at the breakout prices. Remember, trading is not about a sprint to the finish. Becoming a trader is like participating in a marathon. It’s a long and grueling process but the results are tremendously rewarding for those who have what it takes to succeed.

[Source:moneysmartguides.com]Sourse: Thefinancebucks.com