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Is Momentum Trading For You?

Aug 21, 2008
Momentum traders seem to get involved in this type of stock transactions because they love the rush they receive in trading volatile stocks.

Of course, that may be just the reason why you shouldn't get involved. Momentum traders find stocks that are on an upward or a downward swing when they invest in the company. They make money by buying low and selling high or by buying high and selling higher. But as with any kind of investing, there are no guarantees.

Momentum traders must do a lot of work to gather their information. They must read business papers and the online news sites to see which companies are creating the most buzz. The companies that are releasing new products or that must hold a news conference to explain a product failure are going to be of particular interest because they have the greatest possibility of a momentum run.

As a momentum trader you will need to closely follow corporate earning releases and pay attention to what the business forecasters are predicting. In short, it can be a pretty time consuming endeavour. The good news is that as a momentum trader, you aren't just looking for companies whose stock is doing well. A company whose stock is about to nosedive is perfectly suitable for your purposes.

Once you have narrowed down your selection of stocks your research is not over. You now have to take the time to analyze the stock's EPS earning per share) also known as accelerated earnings. Seeing how well a stock did over the past three quarters is an excellent barometer of what the stock's potential is. You will have to check out the morning equity options pages to determine if there have been an excessive number of written calls out on the company you are researching because the higher number of calls can indicate whether a stock price increase or decrease is anticipated to occur.

You are looking to find a breakout stock so the initial morning trading must be watched very closely to see if there is one stock that stands out. Watch the current bid/ask price and the total daily volumes. If you can identify a stock then it is time to buy. Now this is the most difficult part of momentum trading. You are now going to ride the momentum train and although it can be very exhilarating, it is not for the feint of heart.

Once you have clicked the buy option, you simply have to watch and wait to see how the stock does. Will the momentum continue or will the stock just fizzle out? That is something that happens to the best of momentum traders. Sometimes you pick a dud and the best thing to do is cut your losses and get out.

Do you have nerves of steel? Do you have plenty of time to spend reading the business news, Wall Street Journal and a plethora of other sources from the Internet? There is the potential to make a great deal of money with momentum trading, but you must know and understand yourself before deciding to jump into the fray.
About the Author
Mark Crisp is the momentum stock trader. Finding the hot stocks that are going up right now and will continue to go up in the future. Sign up for my free e-course at: http://www.stressfreetrading.com
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