Stocks spend large part of their existence going nowhere. But when they move up or down , they move in momentum bursts.
This phenomenon was observed once market started trading . Technology has changed, program trading , quant trading , algo and you name it , but this basic tendency has not changed.
Swing traders have observed this tendency and developed methods to profit from it. The art and science of swing trading has been passed on from one generation to other and along the way there have been many refinement.
But essence of swing trading is still same , to find the 3 to 5 days momentum burst moves . These moves stat with range expansion. The range expansion is followed by 2 to 4 days of follow through. During that period stock can make 8 to 20% move. Swing traders try to capture half of that profit of 4 to 10%.
This kind of momentum bursts appear frequently and in a year you can find over thousand such moves. This is a number game. You have to capture hundreds of such 8 to 20% moves to make good returns. Occasionally you get a bigger trade but that is a bonus.
Traders have studied this phenomenon in details and have developed scans, indicators, chart patterns, quant methods to capture such moves. Some spend lot of time anticipating such moves. Anticipation can help you capture bigger part of the 8 to 20% move. Some react to these moves and buy breakouts, which leads to capturing smaller part of the move.
Once the momentum burst is over the stock can go in to range, reverse or have orderly pullback and have another burst. Some traders try and capture the two to three burst moves , that leads to higher per trade profit but involves seating through a consolidation period.
Some focus on momentum burst in existing trends. So they first look for established trend and then trade a momentum burst on those stocks. By trading in direction of trend they improve the probability. Some traders focus on momentum bursts near trend change or trend fade areas. In other words they try and play a countertrend move. Fancy name for it is mean reversion.
Some focus on stocks with low price as they tend to be more volatile and often make 20 to 40% moves in 3 to 5 days. Smaller cap stocks and stocks priced below 10 fit this kind of approach.
Some select stocks with high short interest to trade momentum burst . The high short interest leads to explosive move if it results in short squeeze.
Some focus on low float stocks. Stocks with float below 25 million and especially with less than 10 million tend to be more explosive during their swing moves.
Some select stocks based on sector trends to trade the momentum burst. This again is in line with trade in direction of trend approach.
Some focus on value stocks , some on growth stocks.
No matter what specific techniques traders use , the phenomenon of momentum burst is structural in nature and is fundamental to the nature of the stock moves. Once you understand that you can find many ways to trade momentum burst.