Trading on the Stock Market
Momentum Trading on the Stock Market
Momentum trading on the stock market is risky business and may not be the most popular method of trading, but there are traders out there who can stand the heat. Momentum stock trading takes place when a trader sees a stock price rising and joins in. Investors of this type of trading will take a short or long position in anticipation that the momentum of the stock will continue and they typically look to trade stocks that have grown in strength over the past 3 months to a year. Momentum trading on the stock market requires the trader to have impeccable market timing and a concrete trading plan. The golden rule when momentum trading is “buy high and sell higher.”
Momentum traders have their work cut out for them. They have to read business papers, such as the Wall Street Journal and watch online news sites for instant updates. They follow corporate earnings releases and watch to see what business forecasters are predicting for their companies. They also have to analyze the stock’s earnings per share to find out how the stock did over the past three quarters. They study the morning equity options pages and they watch the current bid and ask price, and the total daily volumes. Trading on the stock market using this approach requires that you have the ability to cut your losses and get out. Many times momentum traders buy stock and then watch it fizzle out. There are no guarantees with this method and you have to have a cast iron stomach in order to do this type of trading.
There are benefits to momentum trading and the first is profitability. Knowing what you are doing, good market timing, and a concrete trading plan will allow you to make money trading in this fashion. Additionally, this method is relatively simple, if you are willing to take the time required to commit. The average turnover rate while high is still lower than many other trading strategies and lastly, the trading system for momentum trading does not require total accuracy when picking stocks. Many find that for each stock that loses a small amount that there is another stock that rewards with 50% or higher profit.
There of course are drawbacks with momentum trading on the stock market, like with any trading approach and the first is that success with this type of trading is a result of dumb luck. Some economists are unable to figure out how this strategy actually works. Some believe that it is the case of smart and successful traders taking advantage of the mistakes of their fellow investors and some think it works because the high returns offset the risk. Regardless of these reason, momentum trading is a sound strategy that can provide a great return on investment for those that are good at it.
Momentum trading has the capability to turn a great profit, but the investor must be able to handle the high level of stress and risk associated. If you like the rush and can handle the pressure, this type of trading may be just the thing for you!
Market Direction: There are periods in the market where trading is very uneventful. Obviously the summertime is usually the time of year when the markets slow down dramatically. This is what you call seasonality. Seasonality is the study of what occurs in the markets on a regular basis. There are many simple rules/observations that occur with consistency. Buy the day before a three-day weekend. Sell on the Tuesday after the three-day weekend.
Buy toys stocks in August. Short toys stocks in February. Seasonality is the study of price movements that recur each year based upon investor assumptions. This is valuable information. Do prices move each and every year in the same manner? Definitely not! But that is where the combination of seasonality and candlestick analysis becomes an extremely powerful tool. If it is expected that a certain sector starts getting buying pressure during a specific time each year, candlestick signals become a valuable input. For example, if it is usually time to buy Mattel toys sometime during the late summer most years, the candlestick signals provide a strong visual confirmation that the buyers are stepping in once again at the appropriate time.
Unfortunately, the accumulation of information to perform viable seasonality studies is an extremely big project. The Candlestick Forum will be presenting Best Choice software during our Thursday night trading session on September 11, 2008. Mark your calendar. This session will be very interesting for those investors that would like to add another element to being in the right sectors at the right time.
After a relatively lethargic summer in the markets, the last few days have shown some new strength. Today, the Dow traded up above a mild resistance level, continuing an uptrend that should take it up to test the top of the trading channel. The NASDAQ has the potential of forming in a nice Jay hook pattern. A breakthrough of the 200 day moving average tomorrow would be evidence that the Jay hook pattern was in progress.
Why was it safe to take a vacation over the past few weeks? Because the markets were indicating that they were trading sideways at a time of year when a sideways market would not be unusual. Many investors have a hard time pulling themselves away from trading because they feel they are going to miss something. Having the ability to analyze when the markets are not going to do anything exciting allows an investor to take some time off without any anxiety about missing profit potential.
Even in a slow trend the market, there are still opportunities to make money. It becomes much easier to find those opportunities when using candlestick analysis. As illustrated in some of the Candlestick Forum's recent recommendations, some good potential profits were made based upon the signals and patterns that can clearly reveal a strong price move. The recommendation for HK was based upon bullish signals appearing in oversold conditions and an easily identifiable target making the return worthwhile. A Bullish Harami and the Bullish Engulfing signal produced the evidence that the Bulls were starting to accumulate stock. The 50 day moving average was a very likely target. A six dollar move on a $30 stock makes for a worthwhile trade.
The same analysis was applied to the CSUN recommendation. Confirmation of a Jay hook pattern that was also breaking out above the 50 day moving average made for a high potential, high profit trade. Even in the light of a sideways moving market, there will be stocks/sectors that will produce good profits. Using the simple analysis incorporated into candlestick signals allows for pinpointing profitable trades, even when the markets are not making it very evidence to the rest of the investors where they should be placing their money.
Candlestick analysis makes investing much easier and relaxed once you understand the forces that are illustrated in the candlestick signals. The most compelling factor about candlestick analysis is that it reveals the commonsense investment assumptions in a graphic depiction. The signals themselves are extremely informative and profitable. Adding that information to other high probability indicators continues to improve the probabilities of being in the right trade at the right time.
The Candlestick Forum Team
This Week's Special