Understanding momentum to find explosive stocks Part 2

In the first part of this post I explained what is momentum and how to scan for momentum. The post focused on relative momentum. There is another kind of momentum, absolute momentum which is also widely used by traders to find explosive moves.

What is absolute momentum. Even those who claim they do not use momentum in their trading use absolute momentum unknowingly. Absolute momentum is when you find momentum for a particular stock.

Let us say we are talking about momentum on 6 month timeframe

6 month = 126 trading days

Using Telechart we can find momentum in various ways

c/c126 (relative)

now if we decide we only want to trade stock up say 30% plus in last six month

c/c126>=1.3

it will give us stock with absolute momentum of 30% plus in 6 month.

c/avgc126

will give you six month momentum compared to average price of 126 days

if we decide to convert this in absolute momentum we can say

c>avgc126
All those who insist on stocks to be above say 200, 100, 50, 20 or any other Moving average are basically using absolute momentum

If you say I trade stocks that are within 15% of 52 week high it is also an example of using absolute momentum

Once you understand the two types of momentum, relative and absolute, you can use them to find stocks or develop stock trading scans or setups

Every Friday IBD publishes list of stocks in its weekend edition . it is an example of combining relative and absolute momentum.

Stocks have EPS rating 85 plus

Stocks have RS rating 85 plus (relative momentum)

Stocks are within 15% of 52 week high (absolute momentum)

Most of IBD methodology combines relative and absolute momentum

Nicolas Darvas method was based on absolute momentum. He used to go through stock table to look for stock whose current price was double its 52 week low. His logic was they are proven horses. Once he had list of stocks that doubled from 52 week low he would further reduce the universe of stocks that doubled by looking at stocks that have made all time high.
both are absolute momentum criteria

Doubled from 52 week low (absolute momentum)

At all time high (absolute momentum)

Richard Love in Superfperformance Stock says :

look for stocks that have doubled from 52 week low (absolute momentum)

and that are within 25% of that 100% move . In other word stock should not correct more than 25% from high (absolute momentum)

These are just few examples of using absolute momentum or relative momentum. You can use them very creatively to find right kind of stocks and pinpointed buy or sell points if you further explore this topic. If you study many methods I have highlighted, they use a combination on relative and absolute momentum to find stocks to trade.

If you are motivated trader serious about making lot of money trading go in to depth of this momentum concept and you will find many profitable trading methods.

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