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How To Trade Momentum Stocks

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This article explains how to trade momentum stocks for beginners and experienced traders.

Benefit of Trading Momentum Stocks

If you can find good entries in momentum stocks manage your risk and stick to a good plan you can always trade momentum stocks very well.

However it is very important to first have some idea on how to trade the momentum stocks.

In this article I will tell you a few guides and rules you can follow to trade the momentum stocks.

Breakouts of Daily Charts Are Very Important Signal

If Nifty is rising there is a high chance that 80% of the Nifty 50 stocks will rise.

What You Can Do

Look out for stocks that had seen long period of consolidation. Stocks with good moat and market cap. If they were stagnant for a long time there is almost a certainty that they will move up along with Nifty. You can go long in these shares. It is always better to have some ideas on Candle sticks. For longer term holdings you can go for 50 days moving averages. The longer a stock is trading within a support and resistance, the more powerful the move will be when it breaks major resistance or support.

Breakdowns of Daily Charts Are Also Very Important Signal

Breakdowns is same as Breakouts except its to the downside. A mid-cap stock not doing well still trading range-bound for last 3-4 months will break its support and move down fast if overall the market condition is negative. However you may have to use derivative trading to short a stock. If you use futures or options to short a stock you must learn hedging. 50 days moving averages is also very important here.

Lookout for Pullbacks

Most stocks do not go straight up or down forever. Some stocks make a strong move up or down in matter of days but after certain percentage move a pull-back occurs. Moving averages can come at help here. When new moving average is created look for new support and resistance levels. 20 day moving average a good to know short term trend, 50 day is best for a medium term especially for mid-cap stocks. If you are looking for more profits and can give time then 200 day moving average is a good indicator.

Points to Remember To Trade Momentum Stocks

  • Look out for volatile stocks. Stocks like SBI and HDFC are very lazy in their moves and cannot be considered momentum stocks. Stocks with no range should not be traded.
  • Liquidity is important. Do not trade in non-liquid stocks. You may not be able to get out when required. Ask and bid prices will also be pretty far.
  • Quarterly earnings are important. Momentum stocks will move fast depending on their Quarterly earning report. This is the time when support and resistance levels can be broken easily. This is a great time to trade Momentum Stocks.

    Hope this article helped you to learn how to trade momentum stocks. If you have any questions you can ask in the comments section below. If you are an options trader and losing money you can also learn hedging methods to make monthly income trading options without looking at your computer all day.

    What you should do now

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  • About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

    { 2 comments… add one }
    • chandrakant

      Nice article
      Ex: Steel exchange India ltd.
      This a momentum stock

    • Ashish

      Good article Dilip

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