Bullish Momentum Stocks, Technical Analysis Scanner

SeaMoney ended 2023 with $8.5 billion in cash and equivalents on its balance sheet, giving it plenty of financial flexibility to invest in its business as it sees fit. If it can continue to grow its e-commerce and financial services businesses, the stock’s momentum could last for a long time. One big takeaway is that specialty insurance can be highly profitable for companies that are as good at it as Kinsale. Its underwriting margin has averaged almost 20% over the past three years (most insurers are happy if this metric is in the low single digits).

How to find the best momentum stocks

They can take the volatility factor in their stride and use it to their advantage by maximising their returns on investment through momentum trading. This is because they help in spotting emerging trends by smoothing out price fluctuations over a specified period. While not directly indicative of momentum, moving averages are instrumental in helping traders determine if a market is confined within a range or exhibiting a clear trend. Still, the most common ones include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic Oscillator.

What are the benefits of momentum investing?

A low float momentum scanner identifies stocks with low float and combines this filtered universe of stock with unfolding momentum. It is calculated using the difference between 12 and 26 days Exponential Price Average (EPA). It often gets overlooked for the more popular (and complicated) indicators mentioned above. ADX rises when the price momentum increases, whether the trend is up or down. Since downtrends tend to be the most volatile, quite often the ADX will move up as the price moves down. This makes momentum stock investing very risky, and very much a leap of faith.

Market Momentum Formula

Traders use the stochastic oscillator to identify potential trend reversals and confirm a trend’s strength. Momentum trading in the financial markets refers to a strategy where traders capitalize on the current direction of instrument prices, riding the wave of market trends to earn profits. This approach relies on the principle that assets that are moving in a particular direction are likely to continue moving in that direction for a certain period. Momentum indicators are lagging indicators, which means that they are based on past price movements. As a result, they may not always provide accurate signals for future price movements. Traders should always use other indicators and tools with momentum indicators to confirm their signals.

The Moving Average Convergence-Divergence Indicator (MACD)

You then sell at a profit of 50% before the stock price corrects itself. You’ve made a 50% return over the course of a few weeks or months (not an annualized return). Over time, the profit potential increase using momentum investing can be staggeringly large. Another disadvantage of momentum trading is that it usually requires that you be able to monitor market action throughout the trading day.

• They are called “momentum” indicators as the principles behind price movements are similar to the ones used to calculate speed, momentum, and acceleration.
• Instead of providing coverage for everyday Americans, however, the company specializes in the unusual.
• Remember that no single indicator is foolproof, and it’s important to use a combination of indicators and other tools to analyze the stock market and identify profitable trading opportunities.
• That means if you buy at the wrong time or in the wrong stock, you could see a dramatic loss rather than the big profit you had hoped for.
• High or increasing volume is commonly interpreted as a sign that the existing trend has strong momentum.

What Is the Market Psychology Behind Momentum Trading?

For U.S. Markets, only NYSE and NASDAQ stocks are included, excluding ETF’s. NYSE and NASDAQ stocks also exclude unit investment trusts, closed end funds, warrant stocks, preferred securities and any non-SIC classified stock. There are many charting software programs and investing websites that can measure momentum for a stock so that investors don’t have to calculate it anymore. However, it’s important to understand what goes into those calculations to better understand what variables are used in determining a stock’s momentum or trend.

What Is Market Sentiment?

The Average Directional Index (ADX) is a momentum indicator that measures the strength or weakness of the trend regardless of whether markets are moving up or down. This strategy requires good timing and an understanding of market momentum. It’s important to choose instruments with high liquidity and to be aware of any news or events that might impact stock prices. In addition to these, the Average Directional Index (ADX) is also a valuable momentum indicator.

Closing price compared to moving average

By evaluating these factors, you can choose a momentum scanner that best suits your needs and enhances your trading strategy. So, if you feel you have the skill of identifying momentums in trading, then go ahead and try it. So, this strategy involves entering trades after a price retracement in the direction of the primary trend. The idea is to catch the “pullback” in a trend before it resumes its main direction. The use of ADX helps in distinguishing between strong and weak trends, allowing traders to make more informed decisions about entry and exit points​​. However, even though it’s sound nice, riding the momentum is not that easy.

The Father of Momentum Investing

When the Green KST Line is above the Signal Line, it is a signal to buy, indicating a bullish trend. Conversely, when the Green KST Line falls below the Signal Line, it is a signal to sell, suggesting a bearish trend. By understanding the fundamentals of the KST oscillator and incorporating it into their trading systems, traders can make more informed decisions and improve their overall trading performance.

ETFs and Alternatives for Momentum Investing

However, the train moves but at a higher velocity because all of the momentum built up from accelerating is propelling it forward. They will get out and leave you and other unlucky folks holding the bag. If you do manage to time it right, you’ll still have to be more conscious of the fees from turnover and how much they will eat up your returns.

What Technical Indicators Can Momentum Traders Use?

• However, incorporating momentum indicators into your trading strategy can increase your chances of success and help you make more informed decisions.
• The idea of selling losers and buying winners is seductive, but it flies in the face of the tried-and-true Wall Street adage, “buy low, sell high.”
• Momentum traders usually have strong trading instincts to feel where the market is heading and ride the trend.
• If a trader wants to use a momentum-based strategy, he takes a long position in a stock or asset that has been trending up.
• With this system, an A is better than a B, a B is better than a C, and so on, meaning the better the score, the better chance the stock will outperform.
• One big takeaway is that specialty insurance can be highly profitable for companies that are as good at it as Kinsale.
• It compares the last closing price with a previous one, typically from 14 periods ago (although some traders use 30 periods for smoother signals).

Professional traders may love the free indicators as they serve a valuable purpose, but the professionals will always rely on the premium indicators in the market. Premium indicators can be more precise, offer more information, and be as flexible as the trader needs them to be, which is why they are premium. KST aggregates multiple rate-of-change calculations, providing a smoothed view of price trends while filtering out market noise.

• Instead of the traditional philosophy of trading—buy low, sell high—momentum investing seeks to sell low and buy lower, or buy high and sell higher.
• Along with in-house developed Messenger, these apps now form Meta’s family of products used by almost 3.24 billion people on a daily basis as of Mar 31, 2024.
• Not everyone can be momentum traders, but those who succeed in doing so get a very useful tool to make profits in the markets.
• It’s crucial to confirm the divergence pattern and not rely solely on the RSI.
• While both strategies involve capitalizing on market trends, momentum trading specifically targets securities with strong recent performance, often over shorter time frames.
• Plus, the business has been (successfully) leveraging AI technology to improve engagement and content personalization.

Here are some frequently asked questions about the momentum trading strategies. It’s crucial to confirm the divergence pattern and not rely solely on the RSI. This strategy often works best in a trending market where the RSI divergence can signal a potential continuation of the current trend​​. Note that this article does not constitute financial or investment advice. Always conduct your own due diligence before trading, considering your attitude to risk, experience in the market, and portfolio margin.

How to Find Intraday Momentum Picks

Momentum investing can also be a popular strategy among professional investors such as hedge funds. Momentum investors systematically chase profits, hoping to beat the crowd and get out before the reversal. Rather than be controlled by emotional responses to stock prices like many investors are, momentum investors seek to take advantage of the changes in stock prices caused by emotional investors. That requires discipline and having a specific buying point and selling point.

Understanding overbought and oversold conditions, divergence, and centerline crossovers can help you better interpret these indicators and make more informed trading decisions. To identify divergence, traders often compare a stock’s price to the moving average convergence divergence (MACD) or the relative strength index (RSI). If the price is making higher highs, but the momentum indicator is making lower highs, it may be a sign of bearish divergence. Conversely, if the price is making lower lows, but the momentum indicator is making higher lows, it may be a sign of bullish divergence.

More news from Zacks

• It scans the market in real-time and finds stocks breaking out of their ranges or showing strong momentum.
• For value investors, it’s all about finding good stocks at good prices, and discovering which companies are trading under their true value before the broader market catches on.
• First, you configure your scanner by defining values for your preferred filters and alerts.
• Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.
• Most momentum investors accept this risk as the price for the possibility of higher returns.
• Momentum trading deviates notably from the investment strategy of buying low and waiting for a stock to rise.

This indicator, often overlooked due to its simplicity, is another essential tool. It compares the last closing price with a previous one, typically from 14 periods ago (although some traders use 30 periods for smoother signals). Using momentum indicators to trade is about preference, strategy and the trading environment.

• “While this would be a bold target at first blush, we do not believe that the building blocks are overly optimistic,” Citi wrote.
• This is where as the price continues to trend, the momentum indicator points the other way.
• In a similar respect, some high-flying momentum stocks are pricey for good reason and are likely to be in store for continued and sustained gains.
• There’s an old saying about investing that the best way to make money is to buy low and sell high.
• When the Green KST Line is above the Signal Line, it is a signal to buy, indicating a bullish trend.

Momentum is the speed or velocity of price changes in a stock, security, or tradable instrument. Momentum shows the rate of change in price movement over a period of time to help investors determine the strength of a trend. Stocks Stock Momentum that tend to move with the strength of momentum are called momentum stocks. For investors who want a more hands-on approach without full-time commitment, many financial and brokerage platforms offer momentum screening tools.

They are lagging indicators that compare the current price to averages over a previous period. Traders can observe if the price moves faster or slower relative to its average behaviour in the past. An example of such a momentum indicator is the Moving Average Convergence Divergence (MACD).

Day trading works well with momentum strategies, but it forces players to take larger positions to compensate for not having the greater profit potential of multiday holds. Conversely, it is best to cut your position size when holding for multiple sessions to allow for greater movement and stop placement further away from the present action. Citigroup on Wednesday said its data analysis suggests the recent growth and rally in the cruise space “has real legs” into 2025 and beyond.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

The second month sees it drop further to $40, followed by a decrease to $35 in the third month. By the end of the fourth month, the price falls to $30, then to $25 in the fifth month, and finally down to $20 in the sixth month. So, the investment in Stock B decreases from $10,000 to $4,000, resulting in a 60% loss. Watch for the “flavor of the day” when new products, divisions, or concepts capture the public’s imagination, forcing analysts to throw away calculations and recompute profit estimates. Biotechs and small to midsize technology companies create a generous supply of these story stocks. In this article, we’ll look at momentum investing and its benefits and pitfalls.

Other indicators can be used along with RSI to strengthen this conclusion. To reach the best evaluation, experts generally chart the RSI on a daily time frame rather than hourly. However, sometimes shorter hourly periods are charted to indicate whether it is a good idea to make a short-term asset purchase. For trending analysis, momentum is a useful indicator of strength or weakness in the issue’s price. History has shown that momentum is far more useful during rising markets than falling markets because markets rise more often than they fall. Moreover, momentum traders interpret a certain MACD condition as an indicator of a strong market trend.

In short, momentum trading strategies help you to recognize and follow the trend. So, in this article, we will cover everything you need to get started trading these strategies. We will also show you three different momentum strategies to take your trading skills to the next level. On the chart below, two kinds of signals can be observed with the momentum indicator divergences (blue lines) and overbought and oversold signals (red circles).

These automated investment services use algorithms to create and manage portfolios, with some allowing users to tilt their allocations using momentum strategies. Fortunately, several alternatives allow retail investors the ability to gain exposure to momentum strategies without the need for intensive personal management. Because they are dealing with stocks that will crest and go down again, they need to jump in early and get out fast. This means watching all the updates to see if there is any negative news that will spook investors. Early positions offer the greatest reward with the least risk, while aging trends should be avoided at all costs. The opposite happens in real-world scenarios because most traders don’t see the opportunity until late in the cycle and then fail to act until everyone else jumps in.

The momentum indicators below are some of the proven indicators that traders use. Each indicator has different uses, and some can be used together to strengthen and complement the trader’s research. If you would like more help picking the best stocks on the market, traders should sign-up for the MEM Edge Report.

We explain and test four popular momentum indicators for reliability and to deduce the best settings for traders. The first step to finding momentum stocks is to screen for companies that have recently outperformed the S&P 500 by a significant margin. Then, take a closer look at each stock to figure out why they have performed so well, and whether there’s still upside potential if the company continues to execute on its strategy. Simply put, momentum refers to the inertia of a price trend to continue either rising or falling for a particular length of time, usually taking into account both price and volume information. In technical analysis, momentum is often measured via an oscillator and is used to help identify trends. On paper, momentum investing seems less like an investing strategy and more like a knee-jerk reaction to market information.

Momentum traders benefit from herd mentality, greed, and fear of missing out. This can lead bull markets to rise higher than fundamentals might predict. Like other momentum systems, CAN SLIM also includes rules for when to enter and exit stocks, based mainly on technical analysis.

An asset falling in price may find support at the 50 value and bounce off this level again to continue an upward rise in price action. Suppose you invest for six months, and you have $10,000 to invest in each stock. The following month, it climbs to $75; by the end of the third month, it reaches $85. The upward trend continues, with the price increasing to $90 in the fourth month, $95 in the fifth month, and finally hitting $100 in the sixth month. As a result, the investment in Stock A grows from $10,000 to $20,000, reflecting a remarkable 100% increase. Some robo-advisor platforms now offer portfolio options that incorporate momentum strategies.