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How to use momentum to swing trade

Friday, August 9, 2013 12:01

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BIOD: Biodel Inc. is a momentum stock. It has confirmed momentum since 5/29/2013 according to one year anchored momentum scans we use. The stock recently offered a good trading opportunity for a swing trade.

12.84% profit in 6 days on BIOD

Momentum stocks once momentum is established do not go up continuously. They pause for some time and then have momentum bursts lasting 3 to 5 days. These momentum bursts can be of 8 to 40% magnitude.

This offers swing traders an opportunity to profit from these kind of momentum bursts. The start of a momentum bursts is signaled by a range expansion signal. Everyday I scan for a range expansion on momentum stocks and then look for a low risk opportunity. A range expansion preceded by series of range contraction is a good swing setup.

The range expansion day is entry day. Such momentum bursts are often followed by 3 to 5 days of explosive move. In this case of BIOD at one stage the stock was up 30% or so in just 6 days before reversing and hitting stop.

The stocks with momentum show this phenomenon of momentum bursts and momentum pause several times during their entire move. This offers swing traders opportunities to capture such explosive moves.

Another example of this kind of swing move is on BITA yesterday.

BITA: Bitauto Holdings Limited

The stock showed up in range expansion scan early in the morning. As you can see prior to range expansion there is a momentum pause of several days. From entry the stock is already up 10%.
Update: Closed the trade for 19% profit in a day by 10.10 AM.

The momentum stocks offer several such explosive trade opportunities. In order to catch these kind of opportunities you need understanding of :

how momentum works.
how to set up proper momentum scans
how to setup range expansion scans
how to setup guidelines for good momentum pause
how to setup guidelines for good entry day
how to exit
how to manage risk
how to determine good periods to enter these trades based on overall market direction

All the above requires building skills and building systematic approach step by step and following a set of rules. You don’t need to know what these companies do or what is their earnings or growth prospect. This is just exploiting a recurring structural phenomenon in the stock market where momentum stocks show this kind of action. Whatever might be the reason for these momentum bursts or pauses, what we are interested in is to profit from them.

There are many misconception about how momentum works and there are lot of people who get scared because of high volatility of the momentum stocks. But that is where the profit opportunity is for swing traders. If you can manage the risk you can find explosive opportunities in these momentum stocks. After all the momentum stocks are the fastest moving stocks in the market.

If you are serious about your trading and want to build an enduring edge the Stockbee Member site might help you.

www.stockbee.biz

1949 members and growing…

Source: http://stockbee.blogspot.com/2013/08/how-to-use-momentum-to-swing-trade.html

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