Momentum Trading using front weighted ROC
Instead of using simple ROC or a average two period ROC we can use a weighted ROC. In weighted ROC, ROC's for different periods are added together and assigned weights. So for example you can add ROC of 1 year and 3 month ROC. One of the reason to do this is that recent period price gains or loss get additional importance.
On that narrowed down list it uses chart patterns to time entry.
What does a weighted ROC like this does is it gives you stock with trending characteristics. They have high momentum on all four time frames. When you buy a continuation breakout on such stocks , both probability exists:
In order to avoid the second probability IBD also advises use of another criteria, it says buy breakouts after first or second base and avoid third stage bases.
For Long Term Traders
( (2 * C * 100 / C5) + (2 * C * 100 / C25) + (2 * C * 100 / C40) + (2 * C * 100 / C65) + (C * 100 / C130) + (C * 100 / C195) + (C * 100 / C260)) / 11
He advises taking top 20% stocks ranked by this kind of ROC scan.
For Short Term Traders
( (2 * C * 100 / C5) + (2 * C * 100 / C25) + ( C * 100 / C40) ) / 5
He advises focusing on top 20% stocks by this kind of ROC scan. After first using momentum to narrow the universe of stocks, he uses earnings and other fundamental criteria to narrow this universe. Within that narrower universe he uses a Runaway Pattern criteria "TBBLBG" , which stands for Thrust Breakout (TB), Breakaway Lap (BL), and Breakaway Gap (BG).
If you are primarily a pullback trader, you can use a back weighted ROC to find stocks which are top ranked by one year momentum but are currently having a pullback.
Top ranked stocks with momentum for today
How to trade momentum Part 2
Yesterday we looked at the concept of ROC and simplest way to calculate ROC for momentum trading. But such simple ROC calculation has lag effect. To overcome such lag effect, you can calculate ROC in many different ways. Today we will look at one of the better ways to calculate ROC. That is by using a weighted ROC.
A weighted ROC is a average ROC of different periods. In such cases you derive a average of say a short period ROC and a long period ROC. For example you can calculate 3 month ROC and 1 year ROC and use a average of it. It will give you stocks which have one year momentum plus three month momentum. A stock can be ranked in top 10%by yearly momentum , but because of the lag in data, currently it might be going down on shorter time frame or going sideways. So on a shorter time frame of say 3 month it may not be an ideal momentum candidate.
To find such stocks normally you can use a weighted ROC.