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GPSM | Will Bell |
The Momentum Trader’s Handbook: Understanding Trend-Based Trading Concepts
Important Risk Disclosure: Day trading and momentum strategies involve a very high degree of risk and may not be suitable for all investors. You could lose all of your invested capital. Past performance is not indicative of future results. This content is for educational purposes only and is not investment advice. Trading involves substantial risk of loss. Only trade with money you can afford to lose. Consult a licensed financial advisor.
With my Momentum Day Trading Strategies, our internal tracking identified multiple bullish technical setups based on predefined criteria.
The best part is that I didn’t spend all day in the markets to identify and execute trade setups.
In this training article, I'm going to walk you through the process of understanding my trading strategies STEP BY STEP. You will have to work hard to see good results.
Trading isn't easy, but when mastering the techniques that I'm about to teach you can build your trading confidence.
Okay folks, let us begin by responding to a straightforward question about what Day Trading actually is.
What is Day Trading, And How Does It Work?
In its most basic form, day trading is the act of purchasing stocks with the intent of selling them for a higher price the same day. It's a 1-day trade...
(Short-selling traders sell stocks with the intention of covering at a lower price to make a profit by selling the shares back to the broker).
Unfortunately, the vast majority of first-time Day Traders will lose money.
A high level of risk is inherent in Day Trading and this can cause novice investors to lose tens of thousands of dollars in a short period of time.
Although Day Trading is time-consuming on the other hand, it has the advantage of allowing skilled traders to earn insane profits in as little as 1-3 hours per day.
The majority of aspiring Day Traders desire financial freedom and security, as well as independence.
When I started trading over 20 years ago that was solely my motivation and for anyone who gets into the markets, this is the main reason as well.
To be a successful trader, however, you must first develop a trading strategy that works for you and you'll find this to be very useful in your trading journey.
Momentum Trading Strategy is one of my personal favorites and that's what I'm going to break down in this article.
Buy In The Strength and Sell Into The Strength: My Momentum Trading Strategy
Momentum is the most overall important factor in day trading, swing trading, or in all buy-and-hold strategies.
One of the first things I learned as a new trader back in the late 90s was that the only way to make money in the stock market is to find stocks that are moving bullish, buy them, and sell them too soon.
Some stocks experience significant intraday volatility, though such moves are not predictable or guaranteed.
The question is, how do we identify those stocks before they make a significant move in the market? It was the most important realization that I had late; this held up my success as a young trader as I kept throwing money a bad trade setups:
The stocks that move 15-30 percent in a single day all have a few technical indicators in common.
First, let us take a step back and consider what components we need from my momo (momentum) day trading strategy before proceeding any further with this discussion.
First and foremost, we require a stock that is moving with bullish price action. Stocks that are trading sideways are worthless at this point, trust me.
As a result, the first step for a trader in using this system is to identify stocks that are actively trading. You can discover them by searching through hundreds of stocks.
I only trade Big-Cap Stocks using the same system as our Flagship Trading Newsletter Next-Big Cap Alerts uses when it comes to identifying stocks priced over $5 a share that look to have a bull run.
This means my trade signals search for stocks that have catalysts and is identified through our Trading Signal Alert System.
Almost Always, The Price Action Associated Is More Than Likely Going To Form a 3 White Soldiers Pattern.
Detailed Components For My Day Trading Strategies And The Analysis Of Momentum Stocks.
Momentum stocks all have a few things in common: they are all high-yielding.
In most cases, if we scan through 2000 stocks and only want for the following criteria to be true, we'll end up with a list of less than 18 stocks each day, on average.
These are the stocks that have the potential to move 20-30 percent plus (+) in a given period of time.
These are the stocks that I trade in order to make a living as a trader in the stock market.
Component #1:
The total number of shares outstanding of less than 100 million.
Component #2: Bullish Price Action on the Charts.
Trading prices are higher than the Moving Averages but the price has to be now where near the Level 1 Resistance… The bulls have to have expected room to move.
Component #3: Strong Volume.
The current volume for today is compared to the typical volume for this time of day. The volume in numbers in this list are all standard volume numbers.
Component #4: Fundamentals at Work.
Catalysts like public relations, earnings reports, FDA announcements, and any other type of breaking news that affects the company's operations.
Stocks can also gain momentum even when there is no underlying fundamental catalyst. When this occurs, it is referred to as a Technical Breakout.
Stock Selection
To select a stock...
I can search the entire market for the types of stocks that meet my criteria for showing signs of momentum.
The Next Big-Cap Alerts trading newsletter does just that, and I use the same stock signal set up as the Next Big-Cap Alerts trading newsletter uses to select a stock. (I helped develop the trading system)
This is because the signals they use are the most valuable tools for swing traders and day traders.
When my stock signals send me an alert, I immediately review the candlestick chart and attempt to enter the trade on the first pullback that occurs at the open…
...but sometimes (I have to confess) I trade right on the open in fear of missing out on the Momo Price Action.
You do too at times... I'm sure because winning your next trade isn't easy. It takes supreme discipline not to jump in, and wait for that price pullback.
As a result of this, a large number of buyers in this area, there is a significant increase in volume.
Shrewd traders are all looking to take a cash position in the same stock which results in a rapid price change as the stock moves higher.
As a beginner trader, it is your responsibility to learn how to find the best entry price in real-time. I've created different sets of Trade Signals to be used for three different types of stock strategies.
I have Signals for my momentum day trading strategies, Signals for my Reversal Day Trading Strategies, and Signals for my pre-market Gapping Strategies.
Every day my Trade Signals provide me with a large number of trade alerts.
Using GPSM Stock Alerts Trading Newsletter to find hot potential stocks, whether they are penny stocks, small-cap stocks, or large-cap stocks over $5.00 a share, is something that every trader should be doing.
A watch list overlooked by a person vs a robot or Ai will have a major advantage over Ai Scanners.
Ai is prone to investing mistakes.
Momentum Day Trading Chart Patterns That I Find Particularly Appealing...
Bull Flags charting patterns are profitable chart patterns that new traders should learn how to identify before it breaks out...
...In fact, beginner traders should learn how to use them therefore I created an easy-to-understand dedicated training article to the Bull Flag Pattern for you.
It's a pattern that we see almost every single day in the market, and it provides low-risk entry points into high-quality stocks.
For many new traders, the most difficult part of chart reading is identifying these types of patterns in real time, which can be a level of difficulty at this point...
...it can discourage new traders from really breaking into profit land.
"Bob's Your Uncle" when you GPSM to search for these stocks using the Next Big-Cap Alerts Trading Newsletter that I have developed and that is used by our members.
When you get your morning list of stocks based on our Trade Signals for stocks over $5.00 a share you can see right away which stocks have the highest relative volume in the market.
You can simply go through the watchlist of alerts to identify the stocks that are performing well at any given time of day.
As with most pattern-based traders, I am looking for patterns that indicate the continuation of the current momentum.
Bull Flags Are The #1 Pattern In Momentum Day Trading Strategies.
Bullish flag formations can be found in stocks that are experiencing a strong uptrend.
Bull flags are named after the pattern, which resembles a flag on a pole. The pole is the result of a stock's vertical rise, while the flag is the result of a period of consolidation.
The flag can be a horizontal rectangle, but it's more common for it to be angled down and away from the current trend.
A bullish pennant is a variation in which the consolidation takes the shape of a symmetrical triangle.
The underlying psychology behind the pattern is more important than the flag's shape. Essentially, despite a strong vertical rally, the stock refuses to drop significantly, with bulls grabbing any available shares.
A powerful move higher often follows a flag's breakout, measuring the length of the previous flag pole. It's worth noting that these patterns are also known as bear flags and pennants when used in reverse.
My entry point is the first green candle to make a new high following the pullback, with a smart stop-loss set at the low of the pullback.
Most of the time, when the first candle makes a new high, we will see an increase in trading volume.
Tens of thousands of retail traders are taking positions and placing their purchase orders at the same time as the market opens.
Chart courtesy of TrendSpider.com
Breakout Pattern #2 in Momentum Day Trading Strategies: Flat Top Breakout
The Flat Top Breakout Pattern is very similar to the bull flag pattern, with the exception that the pullback typically has a flat top, as the name implies, where there is a high level of resistance in the market.
This usually occurs over a period of a few candles and will be easy to identify on a chart due to the prominent flat top pattern.
This pattern usually develops when there is a large number of sellers at a specific price level, which forces buyers to purchase all of the shares in order for prices to continue to rise.
This type of pattern can result in an explosive breakout because short sellers will place a stop order just above the resistance level that is forming when they notice the pattern forming.
When buyers break through the resistance level, all of the buy stop orders will be triggered, causing the stock to surge in value very quickly, and the longs will be sitting on some nice profits as a result!
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Examples of Momentum Day Trading Strategies in the Real-Time
An illustration of a bull flag breakout is shown above.
As you can see, we had a strong opening drive on high relative volume, which was followed by a consolidation period on low volume, which eventually resulted in a breakout once more.
These patterns occur on a daily basis, so understanding how to trade them is essential for making money!
The following is an example of another bull flag pattern that worked perfectly, and as you can see, it shared many of the characteristics of the previous bull flag pattern.
With good volume, we had a nice opening drive, which was followed by a low-volume pullback, which was followed by a big jump on the breakout.
Risk Management 1.0: How Do I Know Where to Put My Stop?
In order to avoid overpaying for momentum stocks you have to place a tight stop order just below their first pullback.
Risk is calculated by measuring the distance between entry and stop-loss levels. Position size should be adjusted so that the potential loss aligns with a predefined percentage of total account capital.
This helps maintain consistency regardless of account size.
The Most Profitable Time of Day to Trade
Momentum Trading Strategies can be used during market hours, but you will find that many momentum traders focus on the first hour of market open due to increased liquidity and volatility.
From 9:30 a.m. to 11:30 a.m., I concentrate my trading efforts.
In contrast, we can experience a news spike at any point during the day, resulting in a sudden surge in trading volume for a particular stock or index.
Following a period of inactivity in the trading day, a stock can emerge as a promising candidate to trade on the first pullback.
The first indication of a reversal will usually be in the form of a Bull Flag.
When it gets after 11:30 a.m. and when I'm fully invested in a position I keep a watchful eye on the markets.
During the mid-day and afternoon trading hours, the 1-minute charts have been known to be choppy.
Summary of the Entry Checklist
1. Momentum Day Trading Chart Pattern (#1 for my entry criteria) + (Bull Flag or Flat Top Breakout).
2. Criteria #2: You have a tight stop that allows you to maintain a risk-to-reward structure that justifies the trade relative to potential loss.
3. You must have strong relative volume (2x or greater) and trade be associated with a catalyst in order to be considered for entry. A higher volume range indicates that more people are paying attention and buying.
4. Entry Criteria #4: It is preferable to have a low float. I'm looking for less than 100 million shares, but less than 20 million shares is ideal. eSignal can help you locate the outstanding float.
Indicators for a Profitable Exit
1. Exit Indicator #1: When I reach my first profit target, I will sell half of my position. My personal thoughts are if I'm willing to risk $10 in order to make $20, once I've made $20, I'll sell half of my stock. On the remaining portion of my position, I adjust my stop loss to my entry price on a perfect trade which doesn't happen all the time.
2. Exit Indicator #2: If I haven't already sold half of my position, the first candle to close red is a smart exit indicator. Even if I've already sold half of my stock, I'll continue to hold onto it through the red candles as long as my breakeven point is not reached.
3. Exit Indicator #3: The late trader's entry candlestick spike forces me to start locking in my profits as soon as possible before the inevitable reversal begins.
A late trader entry bar is a candle that spikes up in price and instantly increases after late traders move into the trade and take a position…
In the event that a stock spikes in value while I am holding on to my position, I sell into the strength of the trade.
Final Remarks.
All successful traders will have trading metrics that are positive. Trading is a statistically based profession in order to make money.
You either have statistics that generate profits or statistics that generate losses.
When I worked with students in the past with personal coaching, I examine their profit loss ratios (the ratio of average winners to average losers) as well as their percentage of success in various situations.
This will tell me whether or not they have the potential to be profitable without even looking at their overall profit and loss statement.
Once you have completed each week's trading, you must analyze your results in order to understand your current trading metrics.
Best traders keep meticulous trading records because they know they will be able to data-mine these records to determine what they should do to improve their trading performance.
I print my charts and mark entry and exit prices along with wins to keep track of my trading statistics, which has been extremely useful in fine-tuning my trading strategies.
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