Momentum Stocks: How To Find Momentum Stocks Using a Stock Screener

This kind of trading follows the market, rather than buying low and selling high. This momentum can continue in an upward or downward trend, and it is measured by technical indicators. Momentum traders are typically short-term traders – either day traders looking for intraday profits or short to medium term swing traders. Different stock screeners are tailored to accommodate various trading styles, making it crucial to choose the right screener based on a trader’s specific approach. This strategy utilizes the Relative Strength Index (RSI) to identify hidden divergences in price action.

Ignoring Market Context

They help traders identify overbought (ready to fall) or oversold (ready to rise) conditions, gauge the trend’s strength, and signal potential entry and exit points. Crucially, one of the backbones of momentum trading is recognizing and leveraging volatility in the market. Volatility, in this context, represents the extent of price fluctuations of an asset. Momentum trading strategies usually target short-term market movements, making them versatile enough to align with various trading styles, from day trading to longer-term position trading. The key is to identify the asset of interest, devise a strategy based on technical analysis and indicators, and then execute trades in live markets. There are several momentum indicators that technical analysts can use in momentum trading.

Finding Momentum Stocks by Using a Stock Scanner

Stop losses are crucial in momentum trading because they protect against sudden reversals that can quickly erode gains. They help traders limit losses by automatically exiting a position if the trade moves against them. 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. Seek out securities that trade more than 5 million shares per day whenever possible. Some low float issues can turn into highly liquid instruments when news happens, and volatility spikes as intense emotional reactions draw in market players from diverse sources.

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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.

Are You a Momentum Investor? This 1 Stock Could Be the Perfect Pick

This functionality makes the momentum indicator a vital component in the toolkit of traders, especially for confirming the direction and strength of market trends. Momentum is used in trading to identify stocks with strong price movements and profit potential. Yes, momentum trading strategies have proven to be effective in various market conditions, especially in markets that exhibit strong trends. However, the success of momentum trading strategies mostly depends on the trader rather than the strategy. A momentum trader thrives in volatile and hectic markets, and has the ability to take and extend profits during trending markets.

Top Momentum Indicators

To identify overbought and oversold conditions, traders often use the relative strength index (RSI) or the stochastic oscillator. These indicators range from 0 to 100, with readings above 70 indicating overbought conditions and below 30 indicating oversold conditions. Momentum in the stock market refers to the sustained increase or decrease in the price of a stock. In technical terms, momentum in a stock is a measure of the velocity at which the price of stock changes. The moving average is an average of a security’s price over a specified period of time.

• For U.S. Markets, only NYSE and NASDAQ stocks are included, excluding ETF’s.
• Other momentum indicators useful for reversal trading include the Stochastic Oscillator, ADX, the Williams %R, and the Commodity Channel Index (CCI).
• In this case, a positive line 2 value would mean a strong uptrend and a negative line 2 value would mean a weak uptrend.
• In 2023, SeaMoney’s e-commerce revenue grew by 23% year over year, and financial services revenue increased 44%.
• On paper, momentum investing seems less like an investing strategy and more like a knee-jerk reaction to market information.

What Is Momentum Investing?

And always be prepared for unexpected reversals or corrections that take place. This can happen because of unexpected news or changes in investor sentiment in the market. For example, say you buy a stock that grows from $50 to $75 based on an overly positive analyst report. 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.

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The firm expects Carnival Cruise «should be able to generate substantial yield growth,» based on recent trends and the contribution of its land-based assets like Celebration Key. Citi added that Carnival’s debt and interest reduction should offset any sales growth sacrifices. Momentum investing is a strategy that focuses on capturing the short-term growth of an investment by purchasing a security as it grows and selling it before it falls in value. Growth investors are more concerned with a stock’s future prospects, and the overall financial health and strength of a company. Thus, the Growth Style Score analyzes characteristics like projected and historic earnings, sales, and cash flow to find stocks that will see sustainable growth over time.

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Southeast Asia-based Sea Limited (SE -0.42%) pulled a lot of growth forward during the COVID-19 pandemic. Business then slowed considerably, causing the stock to retreat from its all-time highs before it found momentum again, with a 46% gain barely four months into 2024. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. Rather than «buy low, sell high,» momentum trading follows a strategy of «buy high, sell higher.» 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.

Trend Momentum with ADX

The cruise line’s revenue growth has slowed over the last seven quarters after rebounding following the coronavirus pandemic. Revenue increased 15% to a record $7.89 billion, topping views for $7.82 billion. «While this would be a bold target at first blush, we do not believe that the building blocks are overly optimistic,» Citi wrote. Citi hiked its price target on Royal Caribbean stock to $253 from $204 and kept a buy rating on the shares.

Since it emphasizes quarterly and annual earnings per share (EPS), some may argue it’s not a momentum strategy, per se. However, the system generally seeks stocks with both earnings and sales momentum and tends to point to stocks with price momentum, as well. It’s simple to use short-term and long-term moving averages to spot trending stocks. You can specify that your stock scanner screen for stocks where, for example, a 10-period moving average is above the 50-period moving average. Of course, to screen for downtrending stocks, you specify the shorter period moving average as below the longer-term MA.

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. No – Pure long-only equity momentum strategy implicitly can’t be used as a hedge. The long-short equity momentum factor is also a troublesome for hedging as a momentum factor is prone to “momentum crashes”.

• From the chart above, we can see that the price is forming a higher high.
• They help traders identify overbought (ready to fall) or oversold (ready to rise) conditions, gauge the trend’s strength, and signal potential entry and exit points.
• If you want a combination of all three Style Scores, then the VGM Score will be your friend.
• One explanation for this pattern is the time-varying systematic risk of the momentum strategy because momentum has significant negative beta following bear markets.
• That requires discipline and having a specific buying point and selling point.
• The relative strength line cleared consolidation highs to its best levels since January.
• Thus, the more stocks you own with a #1 or #2 Rank and Scores of A or B, the better.

Stay away from leveraged or inverse ETFs because their price swings don’t accurately track underlying indices or futures markets due to complex fund construction. Regular funds make excellent trading vehicles but tend to grind through smaller percentage gains and losses compared with individual securities. On paper, momentum investing seems less like an investing strategy and more like a knee-jerk reaction to market information. 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.» Citigroup on Wednesday said its data analysis suggests the recent growth and rally in the cruise space «has real legs» into 2025 and beyond.

This is a signal of potential continued momentum in the trend’s direction. Mostly, traders utilize this tool for corroborating price movements rather than for direct trading signals. Stock Momentum An upward crossing of the zero line by the indicator signifies increasing upward momentum in price, whereas a downward crossing indicates a growing downward momentum.

They also demand a disciplined approach to risk management and an ability to interpret market signals accurately. It’s important to practice and become comfortable with the methods in a simulated trading environment before applying them in real trading scenarios. The MACD indicator compares a longer exponential moving average (EMA) with a shorter-term EMA to produce the MACD line, followed by a histogram and a signal line. The crossover of the signal line and the histogram is generally seen as an indicator of a shift in the market’s momentum, which could signal a change in the price trend.

What are popular momentum indicators in stock trading?

Position management takes time to master because securities that are best for momentum trades often carry wide bid/ask spreads. Wide spreads mean you need more significant price changes to make a profit, and the large intraday swings can trigger stop-losses, even if the overall trend is still strong. Choose your holding period wisely because the risk increases the longer you stay in your position. The best momentum trades come when news of a shock hits, triggering rapid movement from one price level to another. In turn, this sets off buying or selling signals for observant players who jump in and are rewarded with instant profits. Another batch of momentum capital enters as the trade evolves, generating counter swings that shake out weak hands.

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