When momentum bursts fail

This is an example of a failed momentum burst setup which I traded recently. Setup failures like these are part and parcel of trading momentum burst setups.

RGEN showed up on momentum burst scan as a good setup. It had everything I look for in a good swing setup. It had orderly consolidation prior to breakout. The volume was higher on breakout day than many preceding day. It was not up 3 days in a row pre entry. It had everything I look for and in 10 out of 10 times I would buy a setup like this.

However next day it quickly sold of hitting the stop. Setup failures like this happen but they are not very common in momentum burst setup. I am happy with even 50% success rate as long as the returns on successful trades in aggregate is larger than failed trades.

Setup failures like this are the reason to manage your risk well in this kind of swing trading approach. You must use tight stops and even with tight stop you should get out of trade if it starts to sgow lack of momentum post entry. A stop even at half of the breakout day range can be considered to manage risk.

Not every setup works, and individual trade does not really matter in larger scheme of things in this method. This kind of swing trading method makes you money over large number of trades. The per trade risk is very small. So you have to do lot of trades to make money.

At other spectrum I trade a different earnings breakout based method where my objective is to have greater than 70% win rates and also to have very high return per trade. In that kind of setups I look for several multiples of my initial risk. Obviously you do not find many trades like that on day to day basis and you have to be extremely selective about the setup.