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I’ve been focusing a lot on momentum trades over the past few weeks and for a good reason – they’ve worked well. 

I’m always excited when momentum gets hot: such names are capable of moving fast, moving far and, if you’re patient with your setups – your risk is well-defined, which is my key focus in trading. 

And if there’s one thing I love even more than momentum trades in and of itself, it’s when they work to a tee. 

My one recent momentum trade turned out as textbook as they come and I’d like to teach you a detailed account of what exactly happened…

Basics of Momentum Trades

The key driving factor of any momentum trade is explosive demand for shares – this is exactly what makes the stock go up, and then higher up, and then some more on top. 

Demand can be broken down into two components:

  • Natural demand: investors actually buying up shares for appreciation.
  • Supplemental demand: forced covering by short traders; long traders buying breakouts; rookie traders chasing a hot stock at any price point. 

As you can imagine, an ideal momentum trade is a mix of the two: without the natural demand a stock would just “pop-and-drop”, and without supplemental demand shares would never move as fast and as far. 

So how exactly does this workout in practice?

RAPT Setup Background:

Up until this Monday, RAPT Therapeutics (RAPT) stock has lived a pretty boring and obscure life: it has spent the past 8 month in $16-$24 range trading very lightly. 

And then, news hit the wires: the company’s drug candidate for treatment of Atopic Dermatitis has delivered promising results in a Phase 1b Trial. 

Is that news enough to get people running for the shares? You tell me:

Some market participants were clearly excited: the stock jumped right out of its 8 month range and what’s more important – it advanced some more and held higher.

Natural Demand? Check!

But as I mentioned, natural demand isn’t enough: 

  1. I’d like to see some supplemental demand, to help sustain momentum
  2. I need an actual trading setup where I can control my risk; I’m not buying for a leap of faith

My Trade Explained

Here’s what the 1-minute intraday chart looked like following the announcement:

What you see above is a very classic example of a trading setup called a “Bull Flag”.

A Bull Flag consists of two things:

  • The Pole: the initial upmove in the pre-market from $17 to a high of $42
  • The Flag: a series of higher lows against clean resistance (at $40) and with clean support – right at VWAP. The Flag consolidation serves as confirmation of demand

The idea here is simple: the pole takes the stock to a new area and the flag proves that the new area – how-ever high it might be – still has plenty of demand for the stock. 

Seeing all of this was a no-brainer: I knew there was plenty of natural demand in the $35-$40 range, and I knew a move above resistance at $40 would bring in many long breakout buyers and chasers. 

Supplemental demand? Check!

Plus, as promised, a patient entry gave me a clean risk to trade against – I saw support at VWAP and would’ve been out below $36.

So, long I went, right around the last pullback in the $38.50 area:

“Textbook” Bull Flags aim at a move of ~50% the Pole.

In my case it meant:

($40 – $17) / 2 = $11.50

This trade gave me a risk/reward of about 1 / 4.5 and a target in the $50 area. 

The rest was history – history made in about 15 minutes of after-market session. 

RAPT broke above $40 nearly immediately and played out exactly how I planned it to. 

This trade was worth a detailed walk-through. 

Not all your trades will work like this, but the good news is – they don’t have to!

There’s no need to aim for perfection: just stick to setups you know well and employ strict risk management, and your odds may get a good boost. 

 

Author:
Jason Bond

3 Comments

  1. What a great analysis Jason. Yes it’s been a long time and I’ve been through a lot as I acknowledge same holds true for you. I’m back trading again but still working very hard in a number of other areas to make up for some really rough financial reversals. However I’m glad you got through the B S crap from the regulators and now it’s back to business as usual. I’m trading “swings”, – mostly options, and ranges – mostly stocks- with a few commodities mixed in. I’m happy to be back watching your trades and trying to make some money from your leadership and ideas. Hope you and your family are well. Best wishes

    P. S. Have a look at a few Securities.
    1. ARVL 2. MGNI 3. IGT
    I haven’t seen these mentioned in your site and thought they might be worthy of passing on

    Michael Kruke

  2. I’m learning. I still like the idea giving us a heads up when yuu buy and when you sell. Good advice to follow thru. V

  3. Hello Jason , what’s up! hope during life going to much best,thanks to your purpose mind sharing with me it’s healpful being update my perspective mind and knowing interesting about businesses by theway have a great day.

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