Momentum investing can be a great way to identify opportunities, but like any other investment strategy, it isn’t perfect. Just because a stock has recently outperformed the market doesn’t mean it will continue to do so. The top momentum stocks are those that have recently outperformed the S&P 500 and have excellent fundamentals in their underlying businesses.

MACD (Moving Average Convergence Divergence)

• Below are some of the popular momentum indicators technical analysts follow.
• When a stock is overbought, the price has risen too far, too fast, and is due for a pullback.
• The firm upgraded Norwegian Cruise Line to buy from neutral and raised its price target to 30, up from 20, citing its recent strategy shift.
• By using this technique, you should know that you are trading on the backs of other people in the market, and price trends are never guaranteed.
• We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade.
• Swing trading requires a different entry and exit approach than day trading.
• If the trend line is down, the trend is down and the momentum investor sells the stock.

You can specify that your stock scanner screen for stocks where, for example, a 10-period moving average is above the 50-period moving average. Of course, to screen for downtrending stocks, you specify the shorter period moving average as below the longer-term MA. Traders looking for promising momentum trades often aren’t very concerned with the true market value of a stock. Instead, they are focused on the stock’s recent and current price action – more specifically, on gauging whether its price action is indicative of a strong trend.

Top Indicators and Tools for Momentum Trading Strategies

Different momentum indicators indicate different things – for example, when the RSI scores above 50, that signifies positive momentum, which can be indicative of an uptrend in the market. When the RSI exceeds the 70 mark, that can indicate an overbought market. Conversely, RSI numbers below 50 can point towards downtrend momentum, and values below 30 can potentially mean the market is oversold. The secret to day trading is self-discipline with tighter risk management than other investment styles.

Advantages and Disadvantages of Momentum Trading

Momentum is the rate of acceleration of a security’s price—that is, the speed at which the price is changing. Market momentum refers to the aggregate rate of acceleration for the broader market as a whole. The tax implications and the potential for commissions and other fees mean that buying high and selling higher does not come without its fair share of challenges.

• The MACD and RSI are both free indicators widely available on charting platforms.
• A stock with an RS rating of 99 means it’s outperforming 99 percent of other stocks.
• In addition, some strategies involve both momentum factors and some fundamental factors.
• Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.
• You may or may not end up with a profitable trade, but you can at least be pretty well assured that you won’t have your investment capital tied up in a stock that’s going nowhere.

How do you use a momentum indicator?

Conversely, when the shorter-term average is below the longer-term average, it’s a bearish signal, indicating that the trend is down. Some tools for momentum investors help to define the trend, such as the trend line. A trend line is a line drawn from the high price to the low price, or vice versa, over a given time period. If the line is up, the trend is up and the momentum investor buys the stock.

What Are Momentum Indicators?

For example, short-term traders often define a stock’s momentum as its price change over the past 10 days. The Relative Strength Index (RSI) is widely regarded as one of the best technical analysis indicators for momentum trading. It measures the speed and change of price movements, helping traders identify overbought or oversold conditions in a trading asset. Also, its effectiveness in different market conditions makes it a versatile tool for momentum traders. Technical indicators like the relative strength index, moving average convergence divergence, and momentum oscillators are important in momentum trading. They help traders identify overbought (ready to fall) or oversold (ready to rise) conditions, gauge the trend’s strength, and signal potential entry and exit points.

Momentum Tools

• There’s an old saying about investing that the best way to make money is to buy low and sell high.
• Adjusting for two stock splits, a $10,000 investment four years ago would be worth roughly $107,500 today.
• “While this would be a bold target at first blush, we do not believe that the building blocks are overly optimistic,” Citi wrote.
• The company’s portfolio offering evolved from a single Facebook app to multiple apps like photo and video sharing app Instagram and WhatsApp messaging app owing to acquisitions.

It scans the market in real-time and finds stocks breaking out of their ranges or showing strong momentum. Perfect for day traders and active investors who want to stay ahead of the trend and make money. With a momentum scanner you can filter through thousands of stocks in seconds and find the ones that match your criteria, saving you time and improving your strategy. While both strategies involve capitalizing on market trends, momentum trading specifically targets securities with strong recent performance, often over shorter time frames. Meanwhile, trend following generally involves a longer-term approach, where traders seek to ride entire trends, regardless of short-term fluctuations.

Exiting With Profits

Divergence occurs when the price of a stock moves in one direction while the momentum indicator moves in the opposite direction. This can signify that the trend is losing momentum and may be due for a reversal. Past performance is not a guarantee of future returns, but it is often a good indicator of positive trends in a business, which can certainly Stock Momentum lead to superior returns over time. Plus, bull markets can be a great opportunity to take advantage of strong momentum in excellent, well-run businesses. If you’re looking for stocks that can thrive in the new bull market, this list represents a good starting point. Just like any other trading style, there are risks that come with momentum trading.

Finding Momentum Stocks by Using a Stock Scanner

• The RS line, the blue line in the chart provided, tracks a stock’s performance vs. the S&P 500.
• It often requires frequent trading, sophisticated analysis, and the ability to closely monitor market trends—tasks that can be time-consuming and potentially costly for the average investor.
• Some companies are trading at low levels for good reason and are likely to see further declines.
• Momentum trading is a strategy that seeks to capitalize on the momentum to enter a trend as it is picking up steam.
• You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets.
• This website is neither a solicitation nor an offer to Buy/Sell futures or options.
• A trader with today’s simple-to-use software may choose to reset the indicators’ parameters to 80 and 20.
• The surge in AI investment has trickled down to businesses in all industries and of all sizes, and Nvidia is a clear beneficiary.
• These indicators help traders identify the strength and direction of a stock’s price movement.
• In technical analysis, momentum can be a very profitable indicator to follow for trading signals on individual securities.

Norwegian Cruise shares rallied nearly 11% Wednesday, now significantly extended from a 20.65 buy point for a double-bottom base. NCLH has been mired in consolidation for 15 months, but the stock jumped 15% this year. One analysts revised their earnings estimate upwards in the last 60 days for fiscal 2024. The direction of a stock’s earnings estimate revisions should always be a key factor when choosing which stocks to buy, since the Scores were created to work together with the Zacks Rank. With more than 800 top-rated stocks to choose from, it can certainly feel overwhelming to pick the ones that are right for you and your investing journey.

How to Find the Best Momentum Stocks

Tesla held its initial public offering (IPO) back in 2010 at $17 a share. Adjusting for two stock splits, a $10,000 investment four years ago would be worth roughly $107,500 today. In 2023, Meta’s operating income grew by 62% year over year thanks to double-digit revenue growth and impressive margin expansion. The business generated $43 billion in free cash flow last year, giving it plenty of financial flexibility to return capital to shareholders or pursue attractive opportunities as they arise.

The second month sees it drop further to $40, followed by a decrease to $35 in the third month. By the end of the fourth month, the price falls to $30, then to $25 in the fifth month, and finally down to $20 in the sixth month. So, the investment in Stock B decreases from $10,000 to $4,000, resulting in a 60% loss. Watch for the “flavor of the day” when new products, divisions, or concepts capture the public’s imagination, forcing analysts to throw away calculations and recompute profit estimates. Biotechs and small to midsize technology companies create a generous supply of these story stocks. In this article, we’ll look at momentum investing and its benefits and pitfalls.

Similarly, if the RSI crosses above its centerline, it may signify a bullish trend, while a crossover below its centerline may signify a bearish trend. To identify overbought and oversold conditions, traders often use the relative strength index (RSI) or the stochastic oscillator. These indicators range from 0 to 100, with readings above 70 indicating overbought conditions and below 30 indicating oversold conditions. The moving average is an average of a security’s price over a specified period of time.

The most basic momentum indicator compares the last closing price to a previous closing price from a set number of periods ago. The default setting is 14, but ome traders use 30 to further smooth out the signals. Momentum indicators help traders understand the strength of a price trend – they measure the rate of the rise or a fall in stock prices. They are called “momentum” indicators as the principles behind price movements are similar to the ones used to calculate speed, momentum, and acceleration. The Moving Average Convergence Divergence (MACD) is one of the top momentum indicators for trend continuation. It works by comparing a longer exponential moving average (EMA) to a shorter-term EMA to produce the MACD line.

That histogram then has a simple moving average calculated on top of it, called the ‘signal line’. The core of both day and swing trading is to search for momentum in stock price movement. The more you focus your research on this strategy, the better your chances of consistently earning money in the market.

Conversely, when a stock is oversold, the price has fallen too far, too fast, and is due for a rebound. Ultimately, RSI is a tool to determine low-probability and high-reward setups. Simply put, the RSI forecasts sooner than almost anything else an upcoming reversal of a trend, either up or down. Welles Wilder Jr. in the late 1970s; his “New Concepts in Trading Systems” (1978) is now an investment-lit classic. Once these numbers are charted, they can be compared to thresholds to see if the stock is oversold or overbought.

If the MACD line 1 has a negative value, it means the stock is in a downtrend. In this case, a positive line 2 value would mean a weak downtrend and a negative line 2 value would mean a strong downtrend. For example, if the MACD line 1 has a positive value, it means the stock is in an uptrend.