How to anticipate a breakout on momentum stocks

Stocks with established momentum are the fastest moving stocks in the market. These stocks offer good   money making opportunities for swing traders who understand and develop expertise in anticipation setup on these.

Once a stock established momentum it seldom goes up straight. During its up move it will on many occasions either pullack or go sideways and rest for few days to few weeks. Then it will again breakout.

 If you can identify such stocks that are setting up for further breakout , then they give you a very low risk entry in to strongly trending stock.  If you do a good job of identifying a buy point on them and watch them closely and enter as soon as they are ready to breakout then you become instantly profitable and can  move the stop to breakeven.

The other big advantage of using anticipation setup on momentum stocks is that they allow you to plan your trade and avoid emotional trading . All the work involved in anticipation setup is much before the market opens. You identify the stocks when market is closed, study them and identify 4 or 5 best setups that have good technical setup and also have some sort of catalyst or fundamental reason to propel them forward.

For working people anticipation offer a better trading opportunity than buying breakouts. To buy breakouts you need to have access to real time scanning or intraday scanning , but that is difficult for most working people. However they can trade anticipation setups by doing 95% of the work after market close or on weekends. If you spend 2 to 3 hours identifying good anticipation setups and researching them on weekend then you have a set of candidates that  you just need to enter during the week.

This weekend I spent 2 hours going through around 600 stocks with momentum to identify the following anticipation candidates:


After that I  researched and prioritised these ideas based on recent earnings surprise, or catalyst and now have around 5 stocks that are my focus list for the week. 

If you are serious about making money trading then you can setup a simple  momentum scan to identify say top 200 stocks by momentum and then focus your attention on that. Those stocks wioll give you enough opportunities to make meaningful difference to your returns.


Anticipation Setup for today



High self efficacy beliefs are key to trading success

"Learning would be exceedingly laborious, not to mention hazardous, if people had to rely solely on the effects of their own actions to inform them what to do. Fortunately, most human behavior is learned observationally through modeling: from observing others one forms an idea of how new behaviors are performed, and on later occasions this coded information serves as a guide for action."

-Albert Bandura, Social Learning Theory, 1977

The most important determinant of your success in trading or in your personal life is your self efficacy beliefs.
People and families with high self efficacy beliefs build successful life and are happy.
If you talk to successful traders and interacted with them on regular basis ( and many are members of Stockbee site), one of the most compelling reason why they are successful is they have high self efficacy beliefs.
Because of their high self efficacy beliefs they figured out profitable ways to trade. No one gave them a 1000 pages manual on trading or held their hands when they were taking baby steps in trading. They figured out things for themselves.
Almost every successful trader I know of has developed their unique style because the changed their self efficacy beliefs.
The days, the months , and the years they spent trying out different things and failing at it or losing money further enhanced their beliefs in their own capabilities.
When you commit to certain thing and surround yourself with like minded people your self efficacy get enhanced.
People's conceptions about themselves and the nature of things are developed and verified through four different processes: direct experience of the effects produced by their actions, vicarious experience of the effects produced by somebody else's actions, judgments voiced by others, and derivation of further knowledge from what they already know by using rules of inference. (Albert Bandura)
This you will find to be true in all walks of your life. If you surround yourself with highly motivated and high self efficacy belief holding people you will find your own belief in your own capabilities get enhanced.
If you work in a group dedicated to enhancing self efficacy beliefs you will often be surprised at how much you can accomplish in short period of time.
The most important determinant of your trading success will be your self efficacy beliefs. It might take some few days to understand that and some years. But once your self efficacy beliefs about trading change things start to happen.
Once that is in place your self talk will change to "hey I can do this", "hey I don't have all the answers but I am confident of finding the answers", "hey I know how to bounce back from setbacks" .
When you attempt trading some find early success and some find early setbacks. That experience sets your self efficacy beliefs.
Some people give up believing markets are too difficult or manipulated or beyond my understanding . Their self efficacy beliefs dictate their behavior.
Self efficacy beliefs are task specific. In trading implication of that is your self efficacy beliefs are setup specific. that is why you will find a trader successful in one style or time frame can often struggle on another setup or style.
Once your self efficacy beliefs specific to trading a setup change you will start experiencing success. That does not mean you will not have setbacks. If you have high self efficacy you will find a method. If you don't have it, even the most profitable method will not work for you and you will keep finding faults with methods.
Self efficacy beliefs is the biggest determinant of your trading success. Unless you work on self efficacy you will find many inhibitors and will be constantly dissatisfied with any method, guides, videos, or instructions, or site. You will constantly chase new methods, new scans, new claims, new gurus, new newsletters, and so on.
Psychologist have found that self-efficacy beliefs help determine how much effort people will expend on an activity, how long they will persevere when confronting obstacles, and how resilient they will be in the face of adverse situations. The higher the sense of efficacy, the greater the effort, persistence, and resilience.
Profitable trading involves all these challenges. You need to put in lot of effort to understand and internalize key concepts like equity selection, entries, exits, risk, risk/reward and then put it all together. In the process you will have several setbacks and false starts. If you have enhanced self efficacy beliefs you will persist in face of such adversities. If you have high sense of self efficacy beliefs then you will spend time mastering trading software, and mastering trading setups and make them work. Absent that you will abandon your effort at first hint of failure.
The research on self efficacy belief shows that self efficacy beliefs can be quickly enhanced by vicariously experiencing others perform a task. This is very important thing to understand in group settings. If you find like minded group you can save years of experimentation and struggle by watching others do things successfully.
Everyday think of how you can enhance your trading related self efficacy beliefs. Surround yourself with people with high self efficacy beliefs. Cut ties with whiners and low self efficacy belief people.
This works for trading as well as for personal and family life.
This Thanksgiving think about this and work on increasing your own and your families self efficacy beliefs. The greatest gift you can give your child is high self efficacy beliefs.


Vehicle selection and setup selection

Selecting right vehicle substantially increases your chance of success. If you select a vehicle capable of big move the probability in in your favor. Let us say you give a serious thought to your vehicle selection strategy and decide to focus on right kind of stocks, that in itself may not guarantee your success if you buy them too late or at wrong price or wrong time or in wrong amount.

After vehicle selection comes the next major decision : setup selection. Setup selection answers the critical question of entries, exits, stops, risk and trade management. Selecting right setup on right stock will help you make money.

Growth stocks and momentum stocks show certain types of setups during their move . If you select those setups as your primary setups then you further increase probability of success.

Unless you understand vehicle selection and setups selection  as key to profitable trading you are unlikely to make much money. Learn setups. Setups give you complete set of rules for every element of a trade for a particular timeframe or style of trading. A well thought out set up for swing trading will give you everything you need to do to trade that setup successfully. Once you understand it you will be able to trade it on your own without needing help.


What is you vehicle selection strategy

The kind of stock you buy or sell is very important if you are looking at making money in the market. If you select a vehicle capable of powerful move , you are putting yourself in good position. If you select dodgy vehicles you are not likely to make much money.

If you are looking for explosive returns you must select a vehicle capable of making explosive move. In order to do that you should know what are the common characteristics of stocks (vehicles) that make big moves historically. And then use those criteria to find similar stocks in current market conditions. 

Historically momentum and growth stocks have made biggest moves in the market. A stock that has great growth happening currently or has in recent quarters had earnings acceleration or surprise are one of he categories of stocks you can focus on if you are looking for big winners. 

OME is a example of stock that has recent earnings surprise and acceleration and that is why it made big move.
 As  you can see this stock in recent quarter had 83% earnings surprise. That triggered the  big move. And that was the bur signal for this stock.

VLRS is another example of stock which we recently bought based on earnings surprise and acceleration and good anticipation setup.

As you can see below the stock had big earnings surprise recently. The stock doubled from its first big surprise of 571%.

One of the recent  buys for me is CRAY, which had 362% surprise. 

The tendency of stocks to make big moves post earnings surprise is called PEADS (post earnings announcement drift). It is a very well researched market anomaly. Stocks that have surprisingly good earnings tend to move in direction of the surprise for next few months to quarters. If you are serious about making money search for all PEADS post on this site. I have written about this in detail several times for many years. 

Momentum stocks are another category of stocks which make big moves. If a stock doubles, it is a very good candidate for doubling , tripling or going up 1000% plus. Momentum stocks every year dominate the list of biggest movers or the year. It is relatively easy to scan for these.

Sometimes a turnaround kind of situation can also lead to big moves in stocks, in the case the real big move happens only after the turnaround started and buying in anticipation is not the best of the strategy. If there is real turnaround you will see earnings surprise and big earnings jump. 

If you do good job of vehicle selection , you put probability in your favor, if you always buy stocks with negative earnings surprise and then expect to make money, then you have no vehicle selection strategy. 

If you want to make money trading do damn good job of selecting the right vehicle. 

What is your vehicle selection strategy?

If you can not answer that question, then you do not have one... and you might as well stop trading ....


How to use the 4% breakout scan to make money

OME is an example of 4% breakout that made 25% move in last 10  days.

If  you want to make money swing trading and find stocks like OME learn about a simple range expansion scan that can find you hundreds of such moves in a year.

4% breakout is a range expansion scan which works best on small and mid caps and lower priced stocks. It allows you to get in to a 3 to 5 days momentum burst kind of move of 8% to 20%
What is 4% breakout scan
c/c1>=1.04 and v>v1 and v>=100000
The scan gives you stock up 4% with 100k volume and with volume surge today.
You have to run it on US Common Stocks in Telechart
Select best setups from the scan
The scan gives you many candidates but you must only select the ones where there was orderly pullback or consolidation before the breakout day.
Stock should not be up 3 days in a row prior to breakout day
Stock should have narrow range day prior to breakout
Stock should have a period of range contraction prior to breakout day
Stock should have orderly first up leg prior to breakout
All in all the quality of setup is important for selecting the best sock to enter.

When should you run the scan
Scan should be run from market opening onwards and once a good setup shows up should be entered as soon as you identify it. That will help you capture rest of the days move. You can also use it for end of the day scanning and enter next day. 
How to manage the trade
The only reason to buy a 4% breakout is that we expect immediate follow through on the move.
That logically makes our stop the low of entry day.

Once you are in the trade either the stock will follow through or fail.
If it fails your stop will take you out.
If it follows though but the follow through is weak then by 3rd day you can be out.
If the stock follows through then you must start planning your exit at right time and also ensure once you have profit you do not give it back.

As soon as stock goes 4 to 5% above entry you should move stop to break even. This should be done intraday itself. Our first objective is to at least not lose money.
Once stock is up 3 to 10 days in a row exit in to strength again it is best to do this intraday as many big gains can fade by end of the day.

In this case of OME once stock had profit the position was sold in to strength and 25% was retained with tight stops yesterday.
How can you use this scan to make money
In order to successfully trade you must setup the scan in software you use and develop guidelines to manage the entire trade from entry to exit.

In order to trade this setup you must have the ability to identify good setup immediately as they start showing up in scan. 
One easy way to develop that skill is to build your own examples of past winners and failures from 4% breakout.

Go  go through and document at least 100 good examples of this setup from past one year and study them carefully , so that you know exactly what a good setup looks like. Make a book of ideal setups

If you are serious about making money swing trading then develop setups like these and trade them. Stop wasting your money or time chasing tips from others or listening to CNBC , develop an expertise in swing trading.