One Of The Best Short Term Trading Strategies Is Based On Momentum
Today I'm going to show you one of the best day trading strategies for beginners as well as experienced day traders. I learned this strategy about 17 years ago and a still use it to this day with only a few minor modifications. The strategy is a momentum breakout technique that catches stocks and other markets while they are going through a period of heavy volatility and momentum.
One Challenge Traders Face Is Finding Momentum
Anyone who has basic experience day trading will tell you that one of the biggest challenges for most traders is finding stocks and other markets that are moving with sufficient momentum and volatility to make day trading worthwhile.
I can tell you from personal experience that there's nothing more frustrating than getting into a fast moving market only to see it slow down immediately after my entry order has been filled.
Because day trading is based on intraday momentum, you want to make sure the markets you chose and the strategies you pick have enough momentum to justify your risk.
Always Start With Daily Chart
You want to start with the daily chart so that you can see the past trading history and the characteristics of the market you choose to trade.
I start out by monitoring stocks that are close to 90 day breakouts. As you know based on my previous articles the 90 day breakout produces the highest ratio of winning to losing trades.
The best candidates for my trades either gap up to a 90 day high or reach the 90 day high by way of extended trading range. I will show you both examples so you can get a good idea of the type of set up you need to find.
The Stock Reaches 90 Day High By Gapping Up Through The Upper Resistance Area
You Need Confirmation Prior To Entry
Once the stock breaks out above the 90 day high I wait for a confirmation signal. There are too many false breakouts and I want to make sure that the momentum is real and not ending immediately after the price breaks out of the trading range.
My condition to entry is a gap day following the breakout from the 90 day price high. This means if the price broke out of the 90 day range by way of gaping up I will want to see a second gap day prior to my entry.
You can see in this example how the stock breaks out and once again gaps up for the second day in a row. This is would be sufficient for me to justify entering the stock.
Notice How The Stock Gaps Again After Breaking Out Of The Trading Range
How To Enter and Exit The Trade
Once you get a solid confirmation by way of a second gap, you can safely enter the market. My advice would be to watch the market carefully prior to the opening and get a feel for the stock you are trading.
If the stock or other market you are trading opens with a gap up you can safely enter a market order assuming there's sufficient volume in the market you are trading.
Most market orders get filled instantly so you will be assured that your condition to entry has been completely satisfied prior to your order being executed.
Once your order is executed you stay with the trade till the closing bell. Since this is a momentum strategy the odds of the closing price being in the top 20th percentile of the highest price is roughly 80 percent so I suggest you hold the trade till the closing bell and exit MOC or (Market on Close)
Your Stop Loss Order Is $0.05 Cents Below The Low Made On Entry Day
How About Another Example
If you were paying attention a few minutes ago you might have noticed that I said that the first or the initial breakout outside the trading range does not have to be a gap but can be an extended range day.
I want to make sure you clearly understand the concept of extended trading range so this example utilizes a stock that breaks outside of the 90 day trading range through volatility and price instead of gaps.
Everything beyond that point is the same except the initial set up can substitute the first gap if the extended trading range is sufficiently strong enough.
There's a formula to calculate the extended range but I will save that explanation for another day. Here you can see how the stocks trading range is almost triple the recent trading range for this stock. This is the type of strong trading range you want to see breaking out of the 90 day price high.
The Breakout Bar Is About Three Times The Size Of The Average Trading Bar For This Stock
Once you identify the stock with a sufficiently high breakout range or a gap as we saw in the previous example you can begin monitoring it prior to the next day's morning opening session to make sure you see a gap opening.
Remember that no matter how good the initial breakout looks you have to make sure your entry is preceded by a gap no matter what. Here's a perfect example of an extended trading range breakout followed by a gap immediately prior to entry.
You Have To Wait For The Gap Prior To Entry No Matter What
You can see in this final example how the entry and the exit appear on an intraday chart. Notice I wait for the gap and then enter a market order immediately after the opening gap.
The order typically takes about 3 seconds to execute on a volatile market. I recommend you watch the market closely prior to the opening so that you are ready to go when and if the gap occurs. The stop loss level is placed $0.05 cents below the gap bar so you should have no problem identifying it and placing it immediately after you are filled.
Place Your Stop Loss Order Immediately After You Get Your Entry Fill Back
Things To Keep In Mind
The Momentum Breakout is one of the easiest and productive day trading methods for traders looking for momentum set ups. Remember that the breakout can be either a gap or an extended range bar.
Either way, you cannot enter the trade prior to a confirmation gap that occurs at the opening after the breakout outside of the trading range.
Make sure you place your stop order immediately after you receive your fill and don't try to exit the strategy prior to the closing bell. This is pure momentum so you want to make sure you give the strategy time to work.