Momentum Trading Strategy

Post on: 11 Май, 2015 No Comment

See the updated 2015 version of my Momentum Trading Strategy, Click Here

Archived Momentum Trading Strategy from 2014

The Momentum Trade Strategies:

This strategy is based on “the Trend is your Friend”. Why try to swim against the current? Just go with the Flow. If you haven’t already studied Candle Stick Charting, check out Steve Nison’s Japanese Candlestick Charting Techniques, Second Edition book on Amazon. It’s an absolute must. You need every advantage over the other trades, and learning to read charts will help you immensely.

Within my momentum trading strategy I have several sub-strategies for specific conditions. Below I will discuss how I use the momentum trade strategy in all my trades.

Summary of my “Momentum Trade Strategies”

For momentum trading I only trade stocks on strong upward or downward trends. These stocks are easy to find using the scanners I have developed. I simply review scanners alerts to identify trends based on upward or downward angle of Bollinger Bands. These days I dont use Bollinger Bands anymore, but if you find them helpful feel free to use them. In combination with bollinger bands, I draw trendlines so I can establish reasonable stop limits and price targets. Scanners alone cannot find patterns on charts. This is where the trader must use their skill to justify each trade.

Once a strong trend is identified either on the intraday level for a day trade, or a daily level for a swing trade, I establish a profit target and stop loss. I use a 2:1 profit/loss ratio. Profit target is always twice the amount of my stop limit. If any of my primary indicators turn against the trade it requires an immediate exit, profit or not. If I reach my profit target and the chart has not yet given me an exit indicator, I set a trailing stop limit based on a dollar amount. If my original profit target was $400, I will use a $50 trailing stop once I’m up more than $450. This allows me to focus my attention on other stocks knowing my profit is protected on that trade. Typically I use a $200 stop limit and a $400 profit target. I can trade 10k shares and this means -2 cents down(-200) +4 cents up(+400), or 5k shares is -4 cents down(-200), +8 cents up (+400), etc.

How to enter a stock that is already moving quickly? (see Flat Top Breakout trades )

Say a stock has already moved 10% on the day, how do you jump on momentum without chasing? I look for entries based on pullbacks. Typically during an upward trend the stock will pullback at times to the 9 moving average. Once it pulls back, it usually holds this level and bounces off the 9ma to make another run to a new high of day. I will do one of two things. I will either buy once the 9ma has held and the candles are starting to go green again. Or I will wait for a double top and a breakout to a new high of day. In either case, my stop limit will be based on the uptrend breaking down. Typically I would hold through a pullback to the 20ma but if the price breaks the 20ma I will sell for a loss and move on.

How to determine position size?

I check the Average True Range of a stock. Many small cap stocks trade in under 20cent ranges. This means if you entered with what I consider a Full Order of 10k shares, your max profit/loss if you held the entire day would be -2k/+2k. For a stock that has a trading range of $2, your max profit/loss on a 10k order would be -$20k/+$20k. This gives you an idea of the average range of the stock and helps determine how large a position you should reasonable take. Since my stop limit is usually -$200, I would prefer to keep positions on the smaller side for stocks that have high true ranges. This allows me to take a 2-4 cent loss without getting stopped out.

Entry Indicators and requirements: