Momentum Stock Trading - Keys To Profit

Momentum Stock Trading

Momentum Stock Trading - Entry Points Are Key to Profiting From Momentum Trading

By Len Ksobiech

Momentum stock trading is the art of taking profits from the stock market with short-term trades designed to profit from a stock's upward or downward daily momentum. Many investors consider this to be a low risk trading method because, done properly and with discipline, you only enter a trade when the targeted stock's momentum is already moving in your direction.

There are a handful of key factors in successful momentum trading. This article looks at the importance of entry points. An entry point is the point at which you are willing to enter a trade.

Why bother setting specific entry points?

Quite simply, because you want to catch the momentum once it has started, instead of buying and hoping your prediction comes true. For example, let's say Stock XYZ closed at $58, with a recent hi/lo range of $55-60. Your research leads you to believe XYZ is poised to run up. Great! So you put in your order to buy first thing in the morning. But what if the stock opens at $59 and then drops down to $56? Now you've got initial downward momentum working against you and quite possibly, a losing trade on your hands. The key to successful trading on momentum is not playing around within the recent hi/lo range.

How do I select an entry point?

Setting an entry point above the recent hi (if you intend to go long) or below the recent low (if you intend to go short) helps you catch bigger, more significant momentum in your trades. In our example, Stock XYZ was showing resistance at $60, i.e. the price has not recently gone over $60. I would set an entry point at something slightly over $60, like say $60.30. By setting your entry point above the most recent resistance level, your trade will only trigger provided the momentum is already going in the direction you predicted.

In other words, your trade will trigger if the stock price's upward movement reaches your entry point of $60.30. Now you are in play and you have got momentum on your side and a winning trade to manage. If, however, there is initial downward momentum, your trade won't trigger and you have preserved your capital for other trades. Setting proper entry points is therefore essential to your success in momentum trading.

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Len Ksobiech

AM Trades, Inc

Daily strategies for the morning stock trader.

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My Comments:

Beyond The Limitations Of Classical Momentum Stock Trading

This article is really classical momentum stock trading, and makes some good points. But relying only on technical analysis, without looking at the bigger picture of stock cycles, can mean you miss out on substantial share movement and profit.

The key here is that technical analysis lags, and often doesn't show you a trending stock until its' had a price break. In classical momentum trading, this is not bad, and people are often taught to wait til the initial momentum has passed. Erring on the side of caution when relying on technical analysis alone isn't a bad thing actually. But when you refine that approach by using a road-tested momentum stock trading system with the bigger picture stock cycles to determine entry strategies, you not only minimize the risk, but maximize your returns.

Called Elite WaveTrader, this momentum stock trading system shows you important criteria to use before you enter a trade, and near the end; criteria that help calm the emotions and assist you in making rational, effective trading decisions. This includes:

* The proper moving averages I use to determine if a stock is strong or weak

* The right stock cycle based on where a stock is inside of a super-cycle

* The trend line placement to use based on the particular stock cycle

* The levels of momentum and basing quality after the initial breakout

* Volume analysis to determine the commitment of fellow traders to the stock

* Where the broad market is in its own cycles

Of course, if you don't have access to that information then it is better to be conservative. But it will take a lot longer to see a real difference in the value of your portfolio. And even then, waiting for a little while is still no guarantee that a stock has the momentum to really break out. MTrader.com makes the point that, if you imagine a momentum stock like a go-cart on a hilly track (where the hills are resistance points), the stock may or may not have the momentum out of the gate to overcome the hill (resistance point).

The classical momentum stock trading approach described in the above article, where you set the entry point above the most recent hi, will take care of that. But what it won't tell you is where that momentum stock is within it's cycle, or if it is really going to break out, or just gather enough momentum to go over the hill only to fall up short on the next one.

Sure, in this instance, assuming you set decent exit points, you would have made a little bit of money. But not a great deal. And you've effectively tied up your capital in a stock with a very weak momentum. That's not the way to get the sort of significant returns you can get on the stock market. You want to identify power stocks, you want to know where a stock is in its' cycle, and where the stock market itself is. Then, and only then, will you get the kind of results on the share market that you probably wanted when you started trading. You can read more about it here.