Swing trading using momentum bursts
The basic structural phenomenon behind most ideas discussed on this site is " Stocks move in short term Momentum Bursts"
It has been observed and verified that stocks move in momentum bursts during bullish periods in indexes (bull markets).
During "established" downtrend (bear markets) in index they show same phenomenon on the downside. They go down in momentum bursts of 3 to 5 days.
In this kind of momentum burst move in a stock , the first day is range expansion which is immediately followed by follow through.
The sequence looks like:
Range expansion day
Up day (follow through)
Up day (follow through)
pullback
followed by end of momentum
That is the bullish sequence. Variation can be 5 day burst. In rare cases you will get a 8 to 10 day burst.
Sometime it will be variation of the 3 days with inside day or negative day after first day of range expansion.
Sometime it will be variation of the 3 days with inside day or negative day after first day of range expansion.
There are many possible variations but essentially this is an impulse move of 3 to 5 day duration.
During this 3 to 5 days period stock would go up 8 to 20% ( lower priced stock can even have bursts of up to 40%).
Such bursts may or may not have clear identifiable catalyst. You need to know nothing about the company to trade this kind of burst.
This is a pattern and probability based trade.
During this 3 to 5 days period stock would go up 8 to 20% ( lower priced stock can even have bursts of up to 40%).
Such bursts may or may not have clear identifiable catalyst. You need to know nothing about the company to trade this kind of burst.
This is a pattern and probability based trade.
It is largely mechanical way to trade for small profit targets.
(To find stocks likely to go up multi month or year I use other methods. They are also discussed in detail on this site. Just see the sidebar for some of the popular posts)
Move starts with range expansion
Move starts with range expansion
All such momentum bursts start with a range expansion. The first day of the move is range expansion day. Often there is also volume expansion along with range expansion.
The price moves in the direction of range expansion.
When there is range expansion it attracts breakout traders, it attracts other momentum players, day traders, quants and so on. That results in continuation of move for few days.
Range expansion basically means a day which is up bigger than last 5 to 10 days bars. A range expansion preceded by series of range contraction days is good candidate in this setup. Moves preceded by orderly range contraction can be explosive.
A successful momentum burst will lead to immediate follow through. Say a stock breaks out in the morning, it will continue to go up through the day and will have immediate follow through in next 2 to 3 days. And the follow through should also be of big 4 to 5% plus magnitude on second or third day.
In most cases the momentum dies down in 3 to 5 days.
If you keep holding after the 3 to 5 days period, you would often see the stock ends up giving up all the burst gains and may not have another momentum burst for several weeks or months. Sometime the burst gains vanish intraday itself.
Depending on price of the stock such momentum bursts can be of 8 to 40% magnitude. Lower price stocks tend to make bigger moves.
For a stock trading below 5 dollars a breakout day move itself might be of 10 to 20% magnitude. For traders with small accounts that offers good opportunity.
As a practical matter if you have large amount of capital to trade with it is difficult to grow your account by just focusing on these low priced stocks. You might have to buy lots of 50000 to 100000 shares for meaningful difference to your account.
Lower float stocks make bigger moves. Low float and high demand creates explosive moves.
If you see in any year the most short term explosive moves will be on extremely low float stocks. For those with smaller account size there is distinct edge in trading low float stocks.
No specific catalyst is needed for these momentum bursts.
Why do these moves happen?
In some case there might be a specific news catalyst on day of first range expansion day , but in vast majority of these kind of momentum moves, there is no clearly identifiable catalyst.
However tracking news on daily basis might help you enter some of these momentum bursts very early and magnify your profit.
During bull moves in overall market such momentum bursts have been observed for over 100 years.
This is structural nature of market.
You should be independently able to verify this.
Range expansion basically means a day which is up bigger than last 5 to 10 days bars. A range expansion preceded by series of range contraction days is good candidate in this setup. Moves preceded by orderly range contraction can be explosive.
A successful momentum burst will lead to immediate follow through. Say a stock breaks out in the morning, it will continue to go up through the day and will have immediate follow through in next 2 to 3 days. And the follow through should also be of big 4 to 5% plus magnitude on second or third day.
In most cases the momentum dies down in 3 to 5 days.
If you keep holding after the 3 to 5 days period, you would often see the stock ends up giving up all the burst gains and may not have another momentum burst for several weeks or months. Sometime the burst gains vanish intraday itself.
Depending on price of the stock such momentum bursts can be of 8 to 40% magnitude. Lower price stocks tend to make bigger moves.
For a stock trading below 5 dollars a breakout day move itself might be of 10 to 20% magnitude. For traders with small accounts that offers good opportunity.
As a practical matter if you have large amount of capital to trade with it is difficult to grow your account by just focusing on these low priced stocks. You might have to buy lots of 50000 to 100000 shares for meaningful difference to your account.
Lower float stocks make bigger moves. Low float and high demand creates explosive moves.
If you see in any year the most short term explosive moves will be on extremely low float stocks. For those with smaller account size there is distinct edge in trading low float stocks.
No specific catalyst is needed for these momentum bursts.
Why do these moves happen?
In some case there might be a specific news catalyst on day of first range expansion day , but in vast majority of these kind of momentum moves, there is no clearly identifiable catalyst.
However tracking news on daily basis might help you enter some of these momentum bursts very early and magnify your profit.
During bull moves in overall market such momentum bursts have been observed for over 100 years.
This is structural nature of market.
You should be independently able to verify this.
@mhp a member on Stockbee.biz site also posted a backtest with 3 day hold period after range expansion on timeline to show how this works historically.
Here is a profit line from taking up to 6 momentum burst longs per day for the past 10 years, 1000 shares per trade, using simple mechanical rules. As per his backtest.
Stocks seldom run up or down smoothly.
A 30% move in stock over 3 months in a stock might be completed in 2 momentum bursts of 10 to 15% in just 5 to 6 days. Rest of the time the stock might retract or go in range.
In a year you will probably find 5000 to 10000 such 3 to 5 day setups when both bullish and bearish setups are combined.
Momentum burst kind of swing trading allows you to grow your account with very low risk.
For a mere 3 to 5 day exposure to market you capture the most explosive part of the move and you are not seating in dead periods holding stock waiting or anticipating a breakout which may or may not come.
Trading this kind of setup requires extremely good ability to ruthlessly cut losses if a trade does not work immediately .
It also requires skill to exit when things are still in explosive phase and not wait for reversal.
Per trade profit on these kind of trades will be on an average just 5 to 8% as you are only going to get part of the 8 to 20% move. By the time you enter on breakout day the stock might be up 4 to 10% , so you will not be able to capture that part of the range expansion move.
To trade this kind of setup you need to be willing to do 200 to 1000 or more trades in a year.
You make money by compounding these small gains.
So this is high frequency and low per trade profitability method.
There are periods in market where these kind of setups are prone to failure.
This happens near market turns where in short period lot of breakouts fail.
The bullish breakout trade needs to be avoided during fast selling phases in market.
The bearish breakdown trade works best after a downtrend is clearly established on 10 plus day time frame.
In a bull market trading 3 day bearish setups will lead to lot of failed breakdowns.
Because of the nature of the overall markets (they have significant positive bias), there are in number terms more bullish momentum bursts than bearish momentum bursts.
Once you understand this momentum burst based short term phenomenon, the next task becomes how to trade it by setting up proper procedure for it.
There are many ways to do this. Traders like @mhp trade it completely mechanically and have shown long years of profits.
His system is completely mechanical and based on custom developed software and execution tools.
Traders like me trade the method using discretion. I do not take every setup. I use some well defined criteria to only try and buy good quality setups.
There is extensive discussion of this on this site and the scans and steps I use are detailed here multiple times. I use Telechart to do this but people have replicated same thing in various other softwares.
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13 comments:
Nice post!
While studying some of my past trades, I noticed that for those small set of trades, a weekly-momentum-burst strategy would've been as much or more profitable, than a daily-momentum-burst.
What are your thoughts on weekly-momentum bursts? Especially in comparison to daily-momentum bursts? Any gotchas out of your experience?
Thanks!
It is better to enter on daily time frame as these moves are only 3 to 5 days in duration
I noticed that the profit line image is not available is there any way I could view that?
Ithink that person deleted the image
What would you say an average yearly return could be using strictly momentum burst?
For a skilled trader around 40%. I do not trade it as single strategy I trade it along with other strategies. But you need to develop skills to trade momentum burst. It takes 6 to 12 months to be good at it
Which strategy would be a good compliment to momentum burst?
Anticipation and pullbacks
For a 3 day momentum swing, once entered for example on range expansion day, do you suggest staying in overnight till continuation phase is over, or is it advisable to exit the first day before closing and re-enter the next day?
hold for 3 days . After 3 days take partial profits and trail rest with stop
When you make after market 4% breakout scan and find good candidate you put buy stop limit order, right? Stop price it's high or close of previous day? How many cents do you put between stop price and limit price. Thank you
I buy during the day when it is breaking out , not next day
How much money can i earn annually on my 1 million account using momentum burst if i am good? And what is best setup to trade if i have big account?
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