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Momentum Strategy
1. Go online to gather the latest economic and financial news and information before the market opens. Pay attention to stocks that have earnings alerts or analyst recommendations and associated news. Typically, such stocks are 'in play' and have the volatility and high volume required for trading a breakout. This activity will yield a 'watch list' of stocks that could represent potential opportunities.
2. Identify key resistance and support. Stock traders use a variety of techniques to determine points of strong resistance and support. Resistance is a price level the stock trades to and retreats two or three times. Support means the stock declines to a specific price level, but does not fall further.
3. Pay attention to the stocks on the watch list and compare them with the general action occurring in the market from the opening bell. Identify patterns, such as a stock moving up as the general market declines, or an equity moving up or down with the market. Determine if the stocks respond to the market as expected and according to the pre-market evaluation.
4. Narrow the watch list to the strongest candidates for a breakout. This could include a stock moving up in value and with heavy volume. Another candidate could diverge from the market behavior with external factors influencing its actions.
5. Examine the stocks' charts. Measure the speed and strength of the stock by the 'Momentum Indicator' or oscillator. This indicator compares the most recent closing price of the stock with its previous closing price. If the momentum indicator crosses up, and is above '0,' it signals a 'buy.' If the indicator line crosses below '0,' it denotes a 'sell.' Some traders use this technical indicator alone; others prefer to include the indicator as part of a more sophisticated trading system. Look for other signs of an impending breakout, such as bids increasing while offers dry up.
6. Verify the market breakout. Execute the trade and watch market activities or indicators. The equity could continue moving up or down as expected or lose it momentum. Determine the 'saturation point.' Watch for a slowdown in bidding or increases on the order side of the market. Sell the position or cover a short sale position. A short sale occurs when traders sell the stock with the belief it will fall in value.