If you’re a short-term trader, momentum stocks can bring you exciting opportunities to ride strong trends. These are stocks that move significantly in one direction, usually upward. They are backed by high volumes and strong sentiments, and these movements are often influenced by breaking news.
However, you might find the process of finding momentum stocks overwhelming. In this blog, we’ll help you understand what momentum stocks are and how to identify them using some simple technical indicators and stock screener tools.
Contents
What Are Momentum Stocks?
Momentum stocks show rapid price movement in a specific direction over a short to medium timeframe. Often, these movements take place due to:
- Reports of positive earnings
- Strong market sentiments
- Any other positive news
Technically, momentum stocks often trade above key moving averages like the 50-day or 200-day MA. This trend indicates the consistent strength of the stocks.
Different aspects can trigger the momentum, like sectoral trends, company-specific news, or broader market catalysts.
Traders look for signs of strength and ride the trend until signs of weakness appear.
5 Tips to Find Momentum Stocks as a Beginner
If you’re just getting started, finding momentum stocks may appear intimidating. However, with the right tools and indicators, beginners can identify strong price trends early.
1. Use a Reliable Stock Screener
The best way to filter for momentum stocks is to use the best free stock screener. Look for screeners that allow you to set criteria like:
- Percentage price change
- Trading volume
- RSI
- Moving averages
These advanced systems make the process simple and beginner-friendly. Simply filter stocks that gained 5% to 10% last week with high volumes to get started.
2. Track Spikes in Volume
Unless a momentum stock has adequate volume, the trend won’t sustain. A sudden increase in volume points to strong interest from traders.
Look for stocks breaking previous resistance levels with volume at least 1.5x higher than average. This volume can be a sign of institutional buying or a breakout pattern. Often, high trading volume points to sustained price movement.
3. Follow the News
Momentum stocks are influenced by external triggers like:
- Quarterly results
- Product launches
- Sectoral tailwinds
- Policy announcements
Set up Google Alerts or use reputable finance platforms to stay updated. If a stock has moved sharply following the news and is trading near its high with strong volume, the upward trend may continue in the short term.
4. Use Technical Indicators
Beginners can start with simple indicators like Moving Averages, like 20-day and 50-day MA. Use other technical indicators like RSI and MACD to find momentum stocks.
A stock trading above its 50-day and 200-day moving averages, with an RSI between 60 and 70, can be a good sign of sustained bullish momentum. You need not learn every indicator. Just understand the ones we mentioned and apply them consistently.
5. Backtest and Paper Trade
Once you identify potential momentum stocks, test your strategy. Use virtual trading or backtest with historical charts to understand how the stock has behaved in the past under similar conditions. This will help you gain confidence before you invest real capital.
Conclusion
While momentum stocks offer lucrative opportunities to traders, you need clarity and discipline to choose the right ones. Most importantly, investors must know how to use the screeners or tools. So, the best approach is to start with a reliable free stock screener and combine it with technical insights.
Stay updated with the news and follow the trend, besides having a strong risk management strategy in place. If you’re a beginner, first learn the patterns to build confidence.
