Identifying momentum stocks for intraday operations is a crucial factor for any investor. Momentum stocks are stocks that have seen an increase in price and volume of trading over the last few days or weeks.
Stock prices can move higher in the short-term if they are on the high side of their normal range, but they will also see increased volatility. Momentum traders aim to capture these moves and make profits by closing positions when prices fall back to their average levels.
To ensure good returns, equity investors are advised to stay invested for a reasonable period of time. This is due to the fact that the risk inherent in equities decreases over time, while the possibility of earning higher returns increases. Some people, however, are not comfortable with staying invested for an extended period of time.
They would rather take profits at regular intervals and then move on to the next hot stock, a high-risk but potentially lucrative game. Although this strategy is not advised.
What exactly is Momentum Stocks Investing?
Momentum investing entails buying and selling stocks that are likely to experience a significant price increase in a short period of time.
In other words, the investor purchases stocks that are about to skyrocket and then sells them at a much higher price. As a momentum investor, one seeks to identify stocks with the potential to produce spectacular returns over a short to medium holding period, say, 1-6 months.
Momentum stocks are usually better positioned to lead the market and reach new highs when the market rallies. Typically, the strategy entails leveraging an existing trend. So, one would try to lock in profits by riding hot stocks, or those that are already experiencing a price increase or momentum. “Momentum investing is essentially betting on stocks that have already gathered momentum,” says Alex Mathews, head of research at Geojit BNP Paribas Financial Services.
This entails daily stock price monitoring and cashing out within weeks or months of acquiring the asset. Therefore, this is not as simple as it appears.
Momentum play can be extremely deceptive and frustrating at times. If you make an incorrect calculation, the money could just as easily disappear.
Getting a fix on such stocks is difficult without the proper tools. “Momentum investing can be rewarding if you can master the use of momentum,” says Hitesh Sheth, head of technical research at Prabhudas Lilladher the available indicators The strategy can work both ways—you can profit from bull markets as well as market declines.”
How to Identify Momentum Stocks?
There are several indicators or tools that can help identify momentum stocks for those interested in profiting from this strategy. However, before you can learn about these indicators, you must first understand how they work.
- Anyone who has driven a car knows that changing directions requires slowing down. Similarly, the speed at which a stock moves up or down will slow before the final turnaround.
- The momentum indicators assist you in capturing this decrease in speed. A stock that is losing momentum, on the other hand, does not always result in a turnaround. Just as a car can slow down and then accelerate again, a loss of momentum should be interpreted as an indication of a possible turnaround.
- We explain some simple momentum indicators and a few basic rules using the charts. You can also use these to begin tracking the performance of some potential momentum stocks.
- You will eventually be able to identify stocks that can deliver high, double-digit returns in a matter of months or even weeks. Investors can find these indicators on websites such as yahoofinance.com.
Change in rate
- The rate of change (RoC) indicator is a simple momentum oscillator that measures the rate at which the stock price changes over a given time period. It computes the percentage difference between
- The most recent stock price and the price from n periods ago When plotted as a trendline, it creates an oscillator that oscillates above and below the zero line as the RoC shifts from positive to negative.
- A value greater than zero indicates an increase in upward momentum (a spike in RoC reflects a sharp increase in price), while a value less than zero indicates a decrease in upward momentum.than zero suggests an increase in downward pressure (plunge in RoC reflects a sharp fall in price).
Moreover, this indicator can be if used in isolation. It should be combined with other momentum indicators.
Trading volume
Another indicator to be considered is the trading activity around the stock, which is represented by its trading volume. The stocks that are adequately supported by strong volume
It can be confident of continuing interest, at least in the short term Low trading volumes, on the other hand, indicate a lack of interest in the security and, as a result, momentum. Momentum investors typically prefer to buy stocks that are rising in volume and sell stocks that are falling in volume.
Index of relative strength
The RSI compares the magnitude of recent gains to the magnitude of recent losses. The formula is used to calculate it RSI=100-100/(1+RS), where RS is the average price of the stock on ‘x’ days when it closes up divided by the average price on ‘x’ days when it closes down. The RSI scale runs from 0 to 100, and a stock is considered overbought when it exceeds 70, and undersold when it falls below 30.
However, these are not considered buy or sell signals because the stock may continue to move, causing the RSI to rise or fall significantly. When a stock loses momentum and reverses, a signal is generated, just like with other indicators. In this case, RSI crossing the 70 mark from above is a sell signal, while crossing the 30 mark from below is a buy signal.
The MACD indicator consists of two lines. The first shows the movement caused by the difference between the two moving averages, while the second is the signal line (usually the MACD’s 9-day moving average), which is plotted on top of the first and serves as the trigger for buy and sell signals. When the MACD falls below the signal line, it is a bearish signal that it is time to sell.
Divergence of the MACD
Traders use indicators such as the MACD, RSI, and others to detect divergence between stock price movement and the respective indicator. Negative divergence occurs when a stock makes a new high but the MACD does not (that is, the recent MACD high is lower than the previous high).
This indicates that the buying momentum in the counter has slowed, and thus the uptrend in the stock price may be coming to an end. Similarly, positive divergence occurs when a stock makes a new low but its MACD does not. This indicates that selling pressure has subsided and that the counter’s downtrend may not last long.
Conclusion
Finding stocks with great momentum is a significant portion of the complexity of momentum trading. With the greatest advice on how to pick the top momentum stocks, our experts at StockBox can help you quickly search for stocks experiencing above-average volatility and market activity. Want to explore more and know more about stockbox’s Momentum Trading services.
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