Momentum Trading
Part 1: Daily and Weekly Timeframes
In this blog, I will answer the question what kind of a trader I am. And what kind of technical analysis tools I use to help me make decisions.
I am a momentum trader. Short term as well as longer term. While intraday S&P500 trading, I use the order book /DOM and some basic profiling. For longer term swings, I use commonly available, off the shelf indicators to find opportunities.
What is Momentum?
There are several definitions of momentum - but for me momentum simply means what’s going up keeps going up until stopped and what’s going down keeps going down, unless stopped.
This is a very simple strategy with very simple rules for entry and exit.
Almost everyone I know is chasing momentum. They are coming up with new ways to identify and trade momentum.
While there are a million ways to measure momentum- all very good, I stick to 4 tried and tested indicators.
New Highs and Lows
Gap ups/Gap downs
Bollinger Bands
RSI
None of these were invented by me. They are freely and commonly available on all platforms. I just use them slightly different than most conventional ways to use them.
This post discusses my longer momentum trading tools on a daily and weekly time frame. These concepts may be applicable on shorter term, intraday basis- however, I don’t use these on any thing less than a Daily time frame. FWIW.
This is subscriber only post, building up on my commitment to create educational content for serious order flow traders. This is the latest in a series of posts I started back in November for educational purposes.
The other few are linked below. Go check them out! You do not need to read all of them to understand this post, however, serious traders must not miss them.
Volume Profile for Smart Traders
In addition, I am working on a version 2 of this post using intraday momentum techniques plus my post on the metaverse, Order book (DOM) and Advanced market profiling. On track to release for Christmas 🎄 + New Year’s reading. You do not wanna miss it!
Also, if you want to continue to receive more stuff like this from me, do not forget to hit the subscribe button. Subscribers receive the most content, before any one else does.
New Highs (and Lows):
Nothing makes momentum traders more HIGH than when an asset makes a new HIGHS! This is one of my favorite indicators to measure momentum. And if I am measuring momentum on the downside, I simply flip from HIGH to LOW.
Even if I don’t want to BUY something, I will never SELL something which just made a new 52 Week high. This is ingrained by training.
Also, I will never buy something that just made a new 52 week low. Now while I do ocassonally use 3 month HIGH/LOWS, and ALL TIME HIGH/LOWS, the 52 week High/Low is by far my favorite momentum indicator. A lot of funds, ETF, large traders routinely have programmatic buying that scans for new 52 week highs and buys into those. This gives a natural tailwind to these names.
What about targets and stops?
My targets are relatively tight. Because momentum is a double edged sword, and I do not want to be caught on the wrong side of it.
Let us say you have bought a stock which has not gone anywhere for 5 years. It just means no one cares about it (for now). Your risk from a sudden move down , while there, is quite small. Value traders know what I am talking about 😉
However, the market is not very forgiving when you buy something making new 52 week highs, an asset that is already up 50, 100, 200 % on the year. Your room for error is very small. So, in these kinds of plays, I will have a mental stop right under 20-22% off the highs. Let us say I get in on TSLA at 900 right when it makes a new 52 week high. I will risk in this case around 200 bucks and my LIS will be around 700-710 bucks.
As for targets, a minimum 20% is a given . Once I get there, I will re-assess based on several factors. Like volume. Related markets. General market conditions.
I may take off a portion of the position and break-even the rest. or I may let it run and break-even all of it. There is no one size fits all. However, it suffices to say for all of these trades, my risk is a kosher- 25% MAX. No tolerance here for anything more than that.
Gap ups and Gap downs
A gap up simply means there was no market where the gap happened . There was no one willing to sell in the gap, if this was a gap up. And no one willing to buy, if it was a gap down. By nature of the auction, this can be very bullish if gap up or very bearish (gap downs).
A lot of guys, when a stock makes a gap up rush to sell it, they assume it's gonna fill the gap. It may eventually fill the gap after days or weeks or months or even years.
However, just when the stock makes a gap up , on 200-300% of average volume, it is very dangerous to short such stocks in my opinion as they can continue to run.
Especially if the general market conditions are very ripe . If S&P500 is making new highs, and a stock which has been up 50, 100 % on the year gaps up another 40%… do I really wanna be short this?