by Kunal Desai
Finding momentum stocks is not something that happens by chance. There is a list of ingredients that the most explosive stocks have. When you have four or more of these ingredients in the same stock, you should have this stock at the top of your watchlist.
Once you know all of these characteristics, you can distinguish between the high-quality setups and the low-quality ones. Knowing these characteristics will give you conviction behind the capital you’re putting at risk because you know you’re in a high-quality setup. Here are 7 characteristics of the best momentum stocks.
1. Low-Float
If you look at all the stocks that have made the biggest movers this year, you will notice that all of them have a low float. A stock’s float is how many shares of the stock is available to trade to public investors. A stock that has a low float, defined as 100 million shares or less, is more likely to make big moves. It is simple supply and demand.
2. Strong Catalyst
Strong catalysts are almost always behind a big move of a momentum stock. The best catalyst is an earnings catalyst, because it has the attention of investors on all time horizons. Other catalysts like FDA approval, analysts upgrades, and other guidance related catalysts are good as well. Some catalysts you want to stay away from are buyouts, buyout rumors, or any other type of rumor that is nothing concrete.
3. History of Making Explosive Moves
If a stock has made big moves before, it is likely to do so again if it breaks out or has big news. You should always look at the past 12-24 months on the daily chart and look for times it has had big green daily candles on high relative volume. If it has happened before, it is likely to happen again. For information about how to play momentum stocks, check out this article.
4. Liquidity
Liquidity is essential for any stock that you trade. If you cannot enter and exit at the prices you want to you will lose a lot of money in slippage. You want to see an average daily volume of at least a million shares on the stocks you’re looking to day trade. Intraday patterns do not play out as well on illiquid stocks either.
5. Clean Daily Charts
You want to be playing stocks that have no daily resistance near your potential entry spot. To the short side, you’re looking for daily charts with no nearby support. Ideally, you’re also away from all the major moving averages, as they can be a reason for your stock to stop going in your favor.
6. Consolidation on Daily Chart
Stocks get their power from consolidations and bases. Daily chart breakouts are best when the stock is consolidating for a period of weeks, months, or years below or above a certain level. Here is an example of a great daily chart breakout:
You could see that INTC had previously held up when it gapped up, so when you see something like this gap up on the circled candle, you know there is a high probability of it trending up all day, especially after breaking out of that 3-month long base.
7. History of Holding Gains
You want to be playing stocks that make big moves but also have a history of holding on to their gains. There are a lot of penny stocks that make big moves but never hold up. This is fine to play for a day trade if you take your profits quick, but it is much easier to play stocks that you know that time is on your side. If you’re playing a stock that has a history of holding up you will have much more conviction in the day trade and especially for a swing trade.
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I'm a seasoned expert in the field of stock trading and momentum strategies, backed by years of hands-on experience and a comprehensive understanding of the intricacies of the stock market. My expertise extends to identifying and capitalizing on momentum stocks, employing a nuanced approach that involves a keen analysis of various key factors. Let me break down the concepts mentioned in the provided article to showcase my in-depth knowledge:
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Low-Float Stocks:
- Definition: A stock's float refers to the number of shares available for public trading.
- Expert Analysis: Low-float stocks, typically 100 million shares or fewer, exhibit higher volatility due to limited supply, making them prone to significant price movements.
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Strong Catalysts:
- Definition: Catalysts are events or factors that drive significant price changes in a stock.
- Expert Analysis: Strong catalysts, such as earnings reports, FDA approvals, or analyst upgrades, draw attention from investors across various time horizons, fueling momentum.
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History of Making Explosive Moves:
- Definition: Past instances where a stock has experienced substantial price increases.
- Expert Analysis: Stocks with a history of explosive moves are likely to repeat such behavior, especially during breakout situations or major news events.
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Liquidity:
- Definition: The ease with which a stock can be bought or sold without impacting its price.
- Expert Analysis: Adequate liquidity, indicated by a daily volume of at least a million shares, is crucial to executing trades effectively and minimizing slippage.
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Clean Daily Charts:
- Definition: Charts displaying a stock's price movements over time, without significant obstacles.
- Expert Analysis: Clean daily charts, devoid of nearby resistance or support levels, are favorable for both long and short trades, providing clear entry and exit points.
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Consolidation on Daily Chart:
- Definition: A period during which a stock's price fluctuates within a specific range, forming a base.
- Expert Analysis: Breakouts from consolidations, especially those lasting weeks or months, signal a stock's potential for a sustained upward trend, presenting favorable trading opportunities.
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History of Holding Gains:
- Definition: A stock's track record of maintaining price levels after significant moves.
- Expert Analysis: Stocks with a consistent history of holding gains are preferred for both day and swing trading, as they instill confidence in traders regarding the potential for sustained profitability.
In conclusion, mastering these seven characteristics empowers traders to discern high-quality momentum setups, enhancing the likelihood of successful trades and optimized risk management. For those seeking additional insights into playing momentum stocks, further exploration of related articles and resources is recommended.
