'Citadel Knows More Than You Do,' But Is There A Profitable Trade On Unity And Carvana?

ModernIR’s Founder and CEO, Tim Quast, shared his views on the dynamics of momentum trading during a Monday appearance on Benzinga’s "PreMarket Prep," emphasizing a key point for traders to bear in mind: modest, repeated returns on each trade, rather than large one-time profits, are the secret to wealth accumulation.

"Citadel knows more than you do," Quast said, referring to Citadel Securities, the market-making division of Citadel. The leading global market maker is responsible for executing more than 33% of individual investors orders, "so the only way that you can use the presence of Citadel to your advantage, is to know where the supply and demand imbalances are."

Quast identified four momentum stocks that traders can move in and out of due to their near daily volatility: Carvana Co CVNA, Matador Resources Co MTDR, Unity Software Inc U, and Coinbase Global Inc COIN.

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He emphasized the difficulties associated with trading a highly volatile stock such as Carvana, which exhibits an approximately 10% volatility. To tackle the trading challenges posed by such stocks, Quast recommended implementing a stop-loss order that should be positioned considerably below the stock’s acquisition price to accommodate the heightened volatility.

The trade-off here is increased risk, but with careful consideration of the stock’s behavior, traders can increase their chances of turning in a profit.

Despite volatility and risk, Quast suggests that there’s a high mathematical probability of making a 2%-4% gain on those types of trades. "The entry will take care of itself as long as your exit is 2%," he said.

His advice is simple: “Just take what the market gives you.”

The 2%-4% principle guides his internal model, which netted a 37.2% return by mid-year.

Though, if you’re more of a passive investor, there are momentum trading-focused ETFs like the iShares MSCI USA Momentum Factor ETF MTUM, and the Invesco DWA Momentum ETF PDP, so you can skirt the traditional approach to momentum trading.

Quast’s strategy for momentum trading is consistent with the fundamental definition of the approach, where the emphasis is on leading rather than following the crowd. The idea is to ride the wave of a stock’s upward trend and sell as soon as there are signs of a downward trend, moving the capital to new positions.

Key elements of momentum investing include choosing the right stocks (Quast mentioned the four above), understanding risks in opening and closing trades, opening trades early, managing the position, and consistent charting for profitable exit points.

Above all, investors must understand that the aim is not to make a killing on a single trade, but to make modest gains that compound over time. As Quast puts it, you have to “take what the market gives you” and use it to your advantage.

Watch Monday’s “PreMarket Prep” show below:

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