Have you ever looked at the markets, and wondered…
“How do I capture that quick burst of momentum right as the opening bell rings?”
“How do I participate in a strong trending market when I can’t seem to find an entry.”
What if I told you there’s a simple trading strategy that lets you capture that initial momentum and ride massive trends in the markets all with low risk?
The type of strategy that gives a trader this choice can only come from a Momentum Day Trading Strategy.
Unfortunately, momentum trading comes for many traders can be an emotional roller coaster ride – but it doesn’t have to be!
It all starts with a systematic and logical process to selecting the perfect trade…
Once that is identified, you will be landing monster profits, with low risk, more times than not.
In this article, I will teach you exactly what you need to analyze in the pre-market session to ride massive momentum at the open.
First, we need to identify exactly what momentum means as a trader.
Momentum trading is a strategy in which investors buy and sell stocks according to recent strengths in price trends.
And this goes against everything you were taught in trading 101 classes… that you want to buy low and sell high.
In fact, you will be buying high and selling higher!
Just like in nature, momentum is a factor in which scientists can measure how far a body of mass can travel in a particular direction after a force was applied to it.
And the same can be applied to your trading by using price and volume analysis.
Let’s take a look at what this means…
The History of Momentum Trading
Made popular in the early 1990’s, the Journal of Finance documented a momentum strategy of buying recent stock winners and selling recent losers to generate significantly higher short-term returns compared to the overall stock market.
These techniques have become a piece of the modern momentum trading style used by many day traders.
Today, traders in the financial markets use momentum as a factor to determine how much further a stock can continue moving after a breakout from a pattern.
Some factors used to determine momentum are:
- The rate of change of the underlying price
- The trading volume on the stock
- A stock in motion should stay in motion
That 3rd bullet point may seem weird to you.
So where did it come from?
Well, many traders believe in one simple law that was borrowed from a famous scientist, Isaac Newton.
“An object at rest stays at rest, and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” –Newton’s First Law Of Motion
This law governs nature and it also governs the stock markets and how investors treat momentum trading.
Key Factors of Momentum Trading
Momentum trading is tricky and requires a lot of patience and practice to perfect.
Trading requires lightning-quick reflexes to make sure you get your stock at the right price since a majority of the time you will be forced to chase price higher as it’s running away from you.
And it’s also extremely important that you pay close attention to the general markets as any slightly negative news can ruin your momentum.
So… in order to properly identify when to trade momentum, it starts with these key factors.
5 Key Factors of Momentum Trading:
- Identify a favorable price action, pattern, or breakout
- Search for increased trading volume on the stock
- Make sure there is inertia on the stock prior to entry (Newton’s First Law)
- Look for news supporting the price movement if possible
- Determine all exits required, ie) targets, stop losses, trailing profits, etc.
Now that you know the key factors of momentum trading… Let’s take a look at a few ways to apply this to the markets.
Momentum Trading In The Stock Markets
Now that the basics are covered, let’s take a look at how to apply this to trading the markets.
Let’s reference the 5 fey factors of momentum trading…
1) Identify a favorable price action
It’s best to start by identifying positive price action that may cause a stock to exhibit momentum.
One way that I like to do this is by using moving averages to confirm that the markets are favoring one direction over the other in the pre-market sessions.
This indication is going to signal favorable price action going into the open and may cause a push of momentum to trade on.
Here’s what I mean…
What I spotted:
- 5-period MA under the 10-period MA going into open
- Descending wedge with price testing lower range more frequent than top
These price action signals are starting to show signs of weakness going into the open.
2) Search for increased trading volume on the stock
The stock has exhibited an increasing volume as stock tries to break out below support from the descending triangle in the pre-market session.
This can be seen here:
This increase in volume is a confirmation of the bearish nature of the pre-market, and combined with price, sets up momentum for the stock to continue to the downside.
3) Make sure there is inertia on the stock prior to entry (Newton’s First Law)
Once a positive indication of potential momentum is seen usually in the form technical pattern, locate an area you feel comfortable buying (or selling) the stock.
In this case, the stock appears to be gaining momentum or inertia going into the open at a strong rate.
This is signaling that it is ok to be a bit more aggressive with your orders going into the open and that there should be strong momentum downward on the markets.
Determine all exits required
Targets are going to be based on pre-market and prior market price action.
It’s usually recommended that a trailing stop is used to let the markets run and this way you don’t take yourself out of a trade too early and miss out on that “home run” trade.
Prior to placing any trade, it’s best to outline where you want targets to be triggering exit orders.
This way you are prepared for what happens when the price gets there and don’t need to do extra thinking that can cause trading mistakes.
Here’s what I mean…
As you can see, it’s best to use common technical support levels as targets for your exits.
Putting It All Together
Now that we have covered all of the criteria to trading momentum, let’s put it all together into a trade example.
Let’s look at this and break down each part of the trade.
The trade details:
- The bearish premarket signaled short direction for the trade
- EMA5 < EMA10
- Increasing volume when market’s attempted to break lower, confirming inertia/momentum to downside is real
- Market’s opened with a breakout to the downside from descending triangle
- Using technical analysis, targeted 5-6 target exits to scale out of the position on.
- Kept part of the trade on to trail out toward the end of the trading day
With easy to follow steps, a trader can capture huge momentum in the markets using simple price action and technical analysis to identify a trade in the pre-markets.
There you have it… a simple and highly profitable momentum short on the markets with little risk.
With a simple game plan finding trades like this is easier than you may think at first. It just takes practice and understanding of technical analysis to know exactly when momentum is kicked into high gear.
Remember, momentum trading is a strategy in which investors buy and sell stocks according to recent strengths in price trends.
And this goes against everything you were taught of buying low, selling high, but instead… buying high, and selling higher… or selling low and buying lower.