What are the fastest-moving stocks in the stock market? Momentum stocks!
I love momentum stocks, but they’re risky. The volatility is tough to navigate. But once you figure it out, it can change your trading game for good.
In this post, I’ll go over the pros and cons of momentum stocks and how to trade them. And I’ll give you a few to keep an eye on this year. So let’s get to it…
Table of Contents
- 1 What Are Momentum Stocks?
- 2 Momentum Investing vs. Value Investing
- 3 Pros and Cons of Momentum Trading
- 4 How Do You Find the Momentum of a Stock?
- 5 How to Trade Momentum Stocks
- 6 What Are the Best Momentum Indicators?
- 7 Momentum Trading Strategies for Beginners
- 8 3 Momentum Stocks to Watch in 2021
- 9 Frequently Asked Questions About Momentum Stocks
- 10 Momentum Stocks: The Bottom Line
What Are Momentum Stocks?
Momentum stocks have the potential to rise — and fall — fast. The momentum in stocks is relative to time, volume, and market cap. Large-cap momentum stocks usually won’t move 100% in a day like some of the small-cap momentum stocks do.
Momentum is closely tied to volume and volatility. Usually, the greater the volume, the more momentum and volatility. It’s supply and demand. When more people want in on a stock, the price rises to meet the demand.
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Momentum Investing vs. Value Investing
Momentum investing is buying into large-cap momentum stocks that have seen consistent price action over a few months.
Value investors, on the other hand, want to buy stocks that are underpriced based on the value of the companies behind them. Buyers looking for value use fundamental analysis to see if a company’s financials show its stock is undervalued.
Pros and Cons of Momentum Trading
The biggest pro to momentum trading is the potential gains. You can make huge returns in a short time. That’s why I love momentum stocks so much.
Last year I made over $1 million in profits using the momentum strategies I’ve relied on for 20+ years.* The market’s always changing, but these patterns repeat. Study the past so you can be better prepared for the future.
(Please note: my results are not typical. I’ve spent years developing exceptional skills and knowledge. Always remember trading is risky. Never risk more than you can afford.)
Of course, there are downsides…
Since momentum stocks are so volatile, there can be a lot of trading risk if you’re not careful. Never trade with more than you’re willing to lose … You never know what’s going to happen. If a trade starts going south, cut your losses quickly and move on.
Time constraints can be another disadvantage. If you aren’t constantly watching the markets, you could miss out on big moves. If you have a job, try to set it up so you’ll get as much screen time as possible. The more time you spend watching the stock market, the quicker you’ll learn.
How Do You Find the Momentum of a Stock?
The best way to find a stock’s momentum is to look at the volume and price action.
You can start by scanning for stocks that have made big moves. Those moves can be over a day, a week, a month — it depends on what you’re looking for. If a small-cap stock has gapped up 50% for two consecutive days, there’s likely a lot of momentum behind it.
Then consider the volume. If a stock’s average volume is a million shares per day, and lately it’s been around 200 million, that’s a good sign that it has momentum. Heavy volume tends to push a stock even further in the direction it’s going.
(Quick disclaimer: I proudly helped design and develop StocksToTrade and am an investor in it.)
How to Trade Momentum Stocks
Finding hot momentum stocks is the easy part. Trading them? Not so easy.
Statistics show most traders lose money. Still, many newbies have the crazy idea that momentum trading is an easy way to get rich quick. Wrong! Momentum trading takes time and dedication to master. And there’s still no guarantee that you’ll be successful.
There’s no one-size-fits-all trading strategy for momentum stocks. But I’ve come up with some resources that have proven useful for many traders.
One of these is a simple, effective way to determine how solid a trading setup is. I call it the Sykes Sliding Scale … Go over the Sykes Sliding Scale until it’s ingrained in your mind. It’ll help you prepare for every trade.
For more resources, head over to my YouTube channel. And get my no-cost “Volatility Survival Guide” for tips on how to ride momentum in a volatile market. My free book, “An American Hedge Fund,” will tell you how I got started on my trading journey.
And if you’re ready to take your trading to the next level, apply to join my Trading Challenge. You’ll get access to thousands of video lessons, live webinars, arguably the best trading chat room around, and more.
What Are the Best Momentum Indicators?
These indicators take different parts of a stock’s chart to help paint a picture of what might happen in the future. None of them come with a guarantee … Trading isn’t an exact science.
Relative Strength Index (RSI)
Relative strength index can be helpful in short-term trading. It scores the momentum in a stock’s highs and lows. A score of 30 usually indicates a low point — meaning the stock is likely to rise from there — and a score of 70 usually indicates a high point.
Traders use RSI to see if there are lower highs or higher lows. Lower highs can indicate a falling stock price, and higher lows can indicate an uptrend.
Moving Average Convergence Divergence (MACD)
MACD can be confusing if you aren’t versed in it.
It’s calculated by subtracting a slower exponential moving average (EMA) of a stock from a faster EMA. The difference between the two lines is used to calculate the stock’s momentum.
Still confused? Don’t worry. Most charting software (like StocksToTrade) has a built-in MACD indicator, so all you need to do is click a few buttons and you’re set.
Volume-Weighted Average Price (VWAP)
VWAP is one of the most popular momentum indicators. I think it’s the one to focus on the most. It’s similar to MACD, but it takes average price and volume into account.
Momentum Trading Strategies for Beginners
If you’re a beginner, keep it simple. The simplest strategies usually work the best.
Focus on the biggest movers with higher than average volume. These are the stocks that’ll give you the best opportunities.
Once you’ve got these stocks on your radar, watch for patterns like the supernova and the morning panic dip buy. These are some of the easiest patterns to spot. They can also be some of the most rewarding.
Now, let’s go over a few momentum stocks that you can add to your watchlist…
3 Momentum Stocks to Watch in 2021
I want to be clear that these aren’t recommendations. I’m not giving you stock tips — I want you to think for yourself. I’m showing you these charts to help you learn the patterns and prepare for the next good trading opportunity.
Regen Biopharma (OTCPK: RGBP)
RGBP is a biotech company focused on stem cell regenerative medicines. They use pre-clinical and clinical trials to see how patients react to treatment.
Take a look at the five-day chart ending from mid-April…
This stock went up more than 3,000% over three days! Even if you only get in on a tiny portion of a move like that, you can grow your account.
It’s so important to study the patterns so you’re prepared when opportunities arise. I don’t know how many times I need to say it: Study, study, study!
Marathon Digital Holdings (NASDAQ: MARA)
MARA is in the cryptocurrency space. The company uses its hardware to mine for bitcoin (BTC) and ether (ETH). MARA’s price action is like BTC’s but on a much smaller scale.
Since RGBP was more of a day trade setup, I thought I’d give you more of a longer-term trade idea.
Check out the six-month chart…
You can see on the chart the stock’s been uptrending — with a few dips along the way.
AeroCentury (AMEX: ACY)
ACY leases used aircraft and engines to foreign and domestic airlines. This low float stock has made some big moves.
Here’s the chart…
This chart isn’t quite as clean as the other two, but it shows what can happen when low float stocks get momentum behind them.
Look at the move back in late December. The stock went from under $2 a share to almost $40. That was also the first day it had high volume. It’s been gapping up and down ever since.
Frequently Asked Questions About Momentum Stocks
What Are Good Momentum Stocks?
Good momentum stocks are the ones that make big moves with higher than average volume. Study up and do your research until you find the momentum stocks that can work with your trading plan.
Do Momentum Trading Strategies Work?
Yes! If they didn’t, I wouldn’t teach them. I think momentum trading can be one of the quickest ways to build a small account. But it’s also one of the quickest ways to lose your cash. That’s why you have to work your butt off and cut losses quickly when a trade goes south.
How Do You Measure Stock Momentum?
By continuously taking price differences for a fixed time interval. I think it’s smart to take volume into account as well. When there’s more volume, it’s even more likely that a stock will continue in the direction it’s headed.
How Do You Identify Momentum Stocks for Intraday Trading?
A good stock screener is a big help when trying to identify which momentum stocks you can day trade. Use it to find hot sector stocks that have made big moves on higher-than-average volume. These stocks will have lots of volatility — and that can work in your favor if you’re prepared.
How Are Momentum Indicators Used in Stocks?
Momentum indicators can help determine how likely it is that a stock will continue trending in a specific direction. When momentum indicators show a bullish trend, it can be a good time to buy into a stock. When momentum indicators look bearish, you might want to stay away or try shorting the stock. But I’m not a big fan of short selling these days. It’s too risky.
Momentum Stocks: The Bottom Line
Momentum trading can be one of the best ways to grow your brokerage account quickly. No matter how much — or how little — cash you have, your account can start to grow if you figure out how to capitalize on momentum stocks.
I’ve spent 20+ years figuring out the best ways to trade momentum stocks. It’s not an easy task, but my resources can help make it easier. Apply to join my Trading Challenge to help speed your learning curve.
Remember to keep it simple and trade the patterns that repeat. You don’t need to use some insanely complicated mathematical indicator to figure it out. Just focus on hot sector stocks that move big and have higher than average volume. The higher the volume, the better. And when you spot ‘em, snipe ‘em with a well-prepared plan.
What do you think? Are you trading momentum stocks? Let me know in the comments!