Momentum stocks can grow your trading account exponentially if you know how to manage risk, find good entries, and stick to your trading plan. New and inexperienced traders have to be especially careful because they can destroy there account as quickly as it can grow. Here are some of the best strategies and tips you can use to maximize your profits on these stocks.
Daily Chart Breakouts
Daily chart breakouts are a great daily context to play for momentum plays. The bias is obvious, it is easy to define your risk, and there is usually great risk versus reward. For newer traders, it is easier for most to play setups that are joining an existing trend. You want to look for long periods of consolidation before playing a breakout, like we see with SHOP above. The longer a stock is trading within a range, the more powerful the move will be when it breaks major resistance or support.
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Quantified trading signals can be based on different types of strategies. Some buy high in the hopes of selling higher, while others try to create a great risk/reward ratio by buying low hoping to sell on rebounds or reversals in price action. Here are four different types of trading signals.
- Momentum signals are based on buying strength. Momentum traders wait for a strong move in a stock and then buy and get on-board for a short amount of time. Momentum traders usually trade short time frames of days. These work primarily in bull markets.
- Breakout signals are based on buying all-time highs or 52 week highs, trying to buy high and sell higher. Breakouts are bought trying to catch a parabolic move where a stock could double or even triple over weeks and months. These work primarily in strong bull markets when indexes break to all-time highs.
- Buying oversold dips are based on buying a long term price support level or an oversold oscillator like the 30 RSI, a price extension far from the 10 day EMA, or a -80 to -100 $NYMO. This signal tries to create a great risk/reward ratio based on buying a deep dip of a historical price range. These work best in range-bound markets.
- Trend following signals try to go in the direction of the long term trend by using long term moving averages like the 200 day SMA breaks as buy or sell signals, or all-time highs or lows to enter longs or shorts. These work in trends with higher highs or lower lows.
The original article is authored by Steve and appears on New Trader U. It is available here.