With momentum day trading strategies for beginners I only look to trade stocks on strong upward or downward trends. But let’s step back for a moment and ask ourselves what we require from a momentum day trading strategy.
First of all, we need a stock that is moving. Stocks that are chopping around sideways are useless. So the first step for a trader is to find the stocks that are moving. I use stock scanners to find these. I ONLY trade stocks at extremes. This means I look for a stock having a once in a year type of event.
The price action associated with this event is almost always the cleanest. So our second step is doing a little bit of digging to find out what the catalyst is that will drive this stock to have a 30-40% intra day move. Also remember that not all stocks are capable of putting in 30-40% moves.
This means we have to filter the stocks that are moving by market cap and float. Stocks with a smaller market cap and float will trade faster. This is because there is a reduced supply of shares, and during times of high demand, these stocks can go parabolic!
To find the catalyst I usually check StockTwits to see if somebody has posted a link to the news. I like to trade stocks that recently reported a big earnings beat, a bio-pharmaceutical stock that has just released news, or a small cap stock that has just announced a partnership or contract with a much larger company.
Momentum Day Trading Strategy Plan
With momentum trading you don’t care about the fundamentals of the company. You’re not looking at the current ratio, the P/E ratio or anything like that. You just care about technicals and volume.
I can begin looking for an entry ONLY after I’ve confirmed that the stock is 1) already starting to surge up pre-market or in the first 30min of trading, 2) has a catalyst, and 3) has a small market cap or a low float.
The Momentum Trading Strategy can be used from 9:35-4pm but I find the mornings are almost always the best time to trade. I focus my trading from 9:30am – 11:30am. However, at any time during the day we can get a news spike that will suddenly bring a tremendous amount of volume into a stock.
This stock which was of no interest earlier in the day is now a good candidate to trade on the first pull back. The first pull back will typically take the form of a bull flag. After 11:30am I prefer to only trade off the 5min chart. The 1min chart becomes too choppy in the mid-day and afternoon trading hours.
Trading Patterns I look for in Up Trends
Momentum Day Trading Strategy Pattern: Rising or Ascending Wedge
Momentum Day Trading Strategy Pattern: Rising Rectangle
Momentum Day Trading Strategy Pattern: Bull Flags
Trading Patterns I look for in Down Trends
Momentum Day Trading Strategy: Falling or Descending Wedge
Momentum Day Trading Strategy : Falling Rectangle
Momentum Day Trading Strategy: Bear Flags
Where to set my stop?
When I buy momentum stocks I usually set a tight stop just below the first pull back. If the stop is further than 20 cents away, I may decide to stop out minus 20 cents and come back for a second try.
The reason I use a 20 cent stop is because I always want to trade with a 2:1 profit loss ratio. In other words, if I risk 20 cents, it’s because I have the potential to make 40 cents. If I risk 50 cents or more, it means I need to make 1.00 or more to get the proper profit loss ratio to justify the trade.
I try to avoid trades where I have to generate a large profit to justify the trade. It’s much easier to achieve success if I have a 20 cent stop and 40 cent target vs a 1.00 stop and a 2.00 profit target.
When I’m trading I try to balance my risk across all trades. The best way to calculate risk is to look at the distance from my entry price to my stop. If I have a 20 cent stop and want to keep my max risk to $500 I’ll take 2500 shares (2500 x .20 = 500)
Risk Management Statistics
2:1 = 33% is your breakeven (You make $200 on average and lose $100 on average – This is your target)
1:1 = 50% is your breakeven (You make $100 on average and make $100 on average)
1:2 = 66% is your breakeven (You lose $200 on avg but make ONLY $100 on Average – This is really bad)
Entry Checklist
1. Momentum / Breakout or Breakdown Day Trading Pattern
2. You have a tight stop that supports a 2:1 profit loss ratio
3. You have above average volume associated with a catalyst. High Relative Volume is extremely important. Heavier volume means more people are watching
4. Low Float is preferred. I look for under 20million share floats. You can find the outstanding float with Trade-Ideas
Exit Indicators
1. 1min or 5min candle closes against the direction of the trade (depending on which chart the pattern is forming on)
2. Extension bar forces me to begin locking in my profits before the inevitable reversal begins. An extension bar is a candle that spikes up more than my stop distance.
Stock Scanners for my Momentum Day Trading Strategy
These stocks are easy to find using the scanners I have developed with Trade-Ideas. My Surging Up scanners immediately shows me where the highest relative volume in the market is.
I simply review scanners alerts to identify the strong stocks at any given time of the day. As a pattern based trader, I look for patterns that support continued momentum. Scanners alone cannot find patterns on charts. This is where the trader must use their skill to justify each trade.
Want to Keep Learning? I Teach ALL my Momentum Day Trading Strategies in our Day Trade Courses
In our Trading Course you will learn all the details of this trading strategy. In our Trading Chat Room, you will get my live alerts as I call out my positions and stops. When I see a stock that has extremely high volume I look to get in on the first or second pull back.
Pull backs should take the form of a Breakout Chart Pattern such as Bull Flags or Flat Tops. I am an extremely active trader in the first 2 hours of the market and then I slow way down. I usually don’t trade in the afternoons.
Stocks on the Surging up Scanners that are candidates for the Momentum Trading Strategy can be traded as early as 9:31. Sometimes a stock that wasn’t gapping up and already on my radar for a Gap and Go! Strategy trade will surge with volume out of the gates and come into play for a Momentum Trade.
These stocks may have news or may be experiencing a technical breakout or be a sympathy play to another strong stock or sector.
Trading Momentum
Trading Momentum is what day trading is all about. There is always momentum in the market, we just have to find stocks moving. Stocks Scanners alert me to the strong stocks. I then review the chart and try to get an entry on the first pull back.
Most traders will buy in this same spot. It’s risky to chase stocks so professional traders will instead wait for pullbacks to get in. This allows for proper risk management. By having a profit/loss ratio of 2:1, I can trade successfully with only a 50% success rate.
This gives me a great deal of confidence because I only need to win every other trade I enter. The most important key to success in this strategy is following it strictly. Always look for high relative volume!
