A Day Trader's Guide To Momentum

Well, I’m closing out August only a few thousand dollars in the green. Though that’s better than being in the red, I would have obviously preferred more consistent momentum to help out my win rate.

While lack of upward support did plague most of my losing positions, “momentum” is kind of an umbrella word. In stocks, sports teams and anything else not directly physics-based, momentum is less about the initial force that acted upon a moving object and more about the forces resisting it as it moves.

With regard to stocks, there are three forces of possible resistances I pay attention to when I’m looking for good setups, with or without my scanner.

Volume

The first thing I try to suss out when I see a potential gap trade or just a stock chart that looks interesting its trading volume. Usually, if a stock comes up on my scanner, I check to see how far out of its average range it is trading. If there doesn’t seem to be an upswing in volume, then there is less predictability in how the stock’s price will react, which means I might be more wary of taking a position.

Price

Although it might seem obvious, the vagaries of price levels in spiking or gapping stock play a huge part in establishing where I want to enter a trade or if I want to enter at all. As an example, I recently took a position in General Motors Company GM with minimum success. The reason I took that trade was the same reason I would take a trade on a $2 stock: it was gapping up a few dollars on high volume. However, the risk of running into sellers looking to take profit rises with the per share value of a stock. As a trader, I need to weigh whether the price levels I’m looking at have carried a stock past the support level where will simply break down to once I entered it.

Float

A keystone metric, a stock’s float will tell me more about the potential behavior I might expect from that trade when taken alongside its volume and price metrics. Float, for those who don’t know, is the total number of shares available for the public to buy and sell, with lower float stocks more prone to volatile price moves. While I trade stocks with both high or low float, I always look to see how many shares are up for grabs and compare that to its average price and volume trends. A low float stock might be appealing if it’s spiking on high volume, while a high float stock might seem like a good trade if it’s trading up 50 or 100 percent.

Each of these metrics tells reveals one aspect of a potential trade that I can better anticipate. Together, they work as a sort of venn diagram that informs me on how I should approach a trade. With practice, I was better able to identify the patterns that I was most successful in trading and then replicate those results.