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Momentum trading is a strategy many seasoned traders appreciate, and many newbies seek to learn and master.

That’s not for nothing, and such trades are, in fact very appealing:

  • They may move a lot in a short period
  • The moves are often very one-sided, meaning a stock continues to push higher or lower for quite a while
  • Due to high volatility, these names present both daily and swing opportunities.

I, for one, spend a lot of my time talking and trading these.

But what is it that defines a momentum name?

What are its essential characteristics, and how is it different from all those other stocks out there?

I’m about to share with you what those are!

Great Storyline

What makes momentum names keep going and going and going still?

It’s the fact that people get excited about a stock’s story.

You rarely see a “boring” momentum run.

Let’s think of some of the more recent runners: COVID stocks, cannabis stocks, EVs, meme stocks…

Can you tell what groups them? I can – people are excited to talk about them… and greedy to buy!

And see, it doesn’t have to be anything revolutionary – meme stocks were indeed not, but they were relatable to the public, so the hype train continued to roll forward.

Cryptocurrencies are not stocks, but they’re one great example of a tradable asset that thrives on excitement.

And, paradoxically, as we’ve witnessed over the past year, the higher such names go, the higher they often end up, as more and more bystanders get on board.

I’m not saying you should never consider a “not cool” name, but your odds may go up if a stock’s background makes people want to talk about it.

Volume

Speaking of a good storyline – volume might be the simplest yet one of the most effective ways to judge how much hype there is about a name. .

Let’s go over some recent momentum charts, so I can explain exactly what I mean.

Here’s NIO, Inc (NIO) as it was setting up and running higher alongside other EV names:

Here’s Tilray (TLRY) during the 2020 “cannabis pump”:

Are you noting any similarities?

Both stocks saw steady pick ups in volume as they advanced higher.

See, this comes down to a very simple and obvious logic – hyped up stocks go higher because demand keeps expanding, as more people hop on board.

Increasing volume at higher price levels is something I’m always excited to see – it suggests the public is accepting a stock’s new value and is willing to buy more.

Speaking of holding higher…

Dips Not Allowed

As I often point out, one of the key characteristics of a true momentum name is that it simply doesn’t look back.

There’s so much demand at every chart point that a stock would barely give any dips, and would either continuously grind higher or consolidate steadily following every new push.

Here’s XPeng Inc’s, (XPEV) run up late last year:

Note how with every new push higher, the stock gives virtually nothing back.

But I hear you, last year was outstanding, everything was exceptionally strong… this is never going to repeat!

Well, here’s TLRY’s setup from mid-2018:

And here’s how it ended, just 3 days later:

You see what I see?

When a name is really strong – you don’t necessarily have to buy a dip and hope it gets rebought.

A truly strong stock probably won’t dip in price!

As always, remember that you can’t simply rely on any of the above for a trade decision.

But what good is it to ignore factors that accompany every big move out there?.

Author:
Jason Bond

3 Comments

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