Strategy · Active Trading
MOMENTUM TRADING
BullishUndefined riskIntermediate
Overview
Buying stocks that have shown strong recent price performance, betting that the trend will continue. Momentum works because institutional buying takes time to complete — early momentum buyers ride the wave as more money flows in.
Setup
- 1.Screen for stocks making new 52-week highs on above-average volume.
- 2.Confirm strong relative strength versus the S&P 500.
- 3.Look for institutional sponsorship (rising fund ownership).
- 4.Enter on pullbacks to the 10-day or 21-day EMA in a strong uptrend.
- 5.Use a trailing stop to protect profits (e.g., 8% below the recent high).
Max profit
Unlimited in a sustained uptrend; momentum stocks can run for months.
Max loss
Risk is a sharp reversal. Momentum stocks that break down can fall as fast as they rose. Strict stop-losses are essential.
Breakeven
Entry price.
When to use
During strong bull markets when market breadth is expanding. Best in trending, low-volatility environments.
When to avoid
In choppy bear markets or late-cycle euphoric tops where momentum reversals are sudden and violent.