Profiting from momentum bursts

Understanding nature of momentum moves in market can help you find profitable swing trades. A stock in momentum phase has distinct pattern. It exhibits series of momentum bursts moves lasting 3 to 20 days. 

As you can see in above FSM example this stock entered  Momentum phase in February. The green panel at bottom of chart shows that. Once it established the momentum it has had series of momentum burst moves followed by orderly pullbacks or consolidation. 

As a swing trader if you study and understand this momentum burst phenomenon then you can design and trade swing trading methods to profit from it. This is the basic and inherent tendency of stock moves in any market. 

This Momentum Burst effect has been around since stocks started trading in auction markets. Sudden influx of buyers or sellers creates this powerful phenomenon. This tendency is seen on both bullish and bearish side. It has been observed and verified that stocks move in momentum bursts during bullish periods in indexes (bull markets).During “established” downtrend (bear markets) in index they show same phenomenon on the downside. They go down in momentum bursts of 3 to 5 days.

These momentum burst moves are very powerful momentum thrusts of 3 to 5 days where depending on price stocks can make 8 to 40% move in 3 to 5 days. 

In this kind of momentum burst move in a stock , the first day is range expansion which is immediately followed by follow through.

 FSM chart below shows that kind of range expansion signals which kicked off momentum burst moves.

Bearish momentum burst moves are also common in bearish period or on stock with downtrends.

Such bursts may or may not have clear identifiable catalyst. You need to know nothing about the company to trade this kind of burst. All that you need to know is that these start with range expansion on first day. If you scan for range expansion you will find them on first day of the 3 to 20 day move.

To trade these setups you need to setup range expansion scans that will alert you to the opportunity in these stocks. The other way to find these stocks is by scanning for stocks with established momentum and then scan for consolidation. The second approach will allow you to anticipate a possible breakout.

GWPH is an example of that kind of approach. Stock has established momentum , but is currently consolidating . I am watching it for possible momentum burst range expansion move.

If you can understand this structural tendency of market and verify it yourself through your own independent testing you have one way to build an edge in the market.  It is largely mechanical way to trade for a swing move of 3 to 10 days.