Momentum trading is the best style of trading to make high percentage gains in your trading account in a short period of time. It is not a style for the risk adverse. You can make huge amounts of money in a short period of time, but you also can lose a lot in the same time frame. You must have the right strategies suited to your personality, so that you can execute correctly. Successful momentum traders know their strengths and weaknesses, and tailor their strategy based on both.
Momentum traders like us know what times of the day to trade and what types of stocks to trade that will give us big moves in a short period of time. Let’s start by talking about the trading day, and the three different phases:
Breaking Down The Trading Day
The stock market opens at 9:30AM EST and closes at 4PM EST, Monday-Friday. There are three different phases of the market day: The open, mid-day, and the close. Each time of day requires a different set of patterns and risk management strategies.
The market open is the period from 9:30-10:30. This is a period of price discovery, and it is the wild west of the trading day. This time of the day has the most volatility and volume in stocks.
The middle of the trading day is from about 10:30-2PM. This part of the trading day is characterized by consolidation and lower volatility. Volume dies down and stocks tend to be a lot more choppy this time of the trading day.
The close is the period from 2-4PM. During this part of the trading day more volume comes back into stocks, and you will often see some volatility come into stocks as we approach the market close. Many traders tend to enter and exit positions near the market close.
Trading the Open Is My Focus
Momentum traders like us focus on trading the market open. The market open has the most volume and range, meaning there is the best follow through on all your patterns. We mentioned earlier that momentum traders look to capture big moves in stocks in a short period of time. The open is the best time to capture these kinds of moves, because there is the most volatility and range in stocks during this time.
I rarely put on new trading positions after 10:30, as it just gets choppy and the best momentum trading patterns tend to have a lower probability of working. It is crucial that you prepare before the market open, so you know what stocks you are trading, and where you are going to enter and exit. Things happen to fast at the market open for you to figure it out on the go. You should have everything planned out. Now that you understand the different parts of the trading day, let’s talk about the types of stocks we like to trade.
Focus on Stocks With Momentum
As momentum traders, we are looking to trade stocks with volatility. Most people associate volatility as a negative thing. However volatility for day traders and swing traders is what we want. Volatility is what allows us to use our capital most efficiently, so that it is always generating us income in the right stock. You must be able to manage your risk to trade momentum stocks, otherwise you risk losing a lot of money.
A lot of people also associate volatility in the stock market with penny stocks. You can trade the volatility in penny stocks, but we find that they tend to be less predictable than mid and large cap stocks. What you need to understand is that the price a share of a stock costs does not matter. It’s how much range the stock has that matters for us momentum traders.
There is no difference between a $5 stock going to $5.50 and a $50 stock going to $55. It is the same percentage move. Put $5000 in either stock, you are going to end up making $500 in either scenario. Every day there are a few mid and large cap companies that are capable of making big moves in a short period of time. It is your job to find them before they make a big move.
You also have to know the characteristics of the best momentum stocks in order to anticipate which stocks have a high probability of making a big move. You can learn all of the characteristics of momentum stocks in this article here.
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