Momentum burst is pattern and probability based trade | stockbee


Momentum burst is pattern and probability based trade

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.

These momentum burst moves are very powerful momentum thrusts of 3 to 5 days where depending on price stocks can make 8 to 40% move in 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)


followed by end of momentum

That is the bullish sequence. Bearish sequence will be reverse of that.

Variation of this momentum burst can be  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.

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% to 100%).

Such bursts may or may not have clear identifiable catalyst. You need to know nothing about the company to trade this kind of burst. All that you need to know is that these start with range expansion on first day. If you scan for range expansion you will find them on first day of the 3 to 5 day move.

If you can understand this structural tendency of market and verify it yourself through your own independent testing you have one way to build an edge in the market.  It is largely mechanical way to trade for a swing move of 3 to 5 days. 
Your holding period in these trades is just 3 to 5 days. Sometime in just 3 to 5 days you get very explosive returns and in most cases you get 5 to 20% returns for 3 to 5 day hold. Which if you compound by finding hundreds of such trades in a year , it can add up.

The other good thing about these trades is they allow you to put very tight stops and you can also use time stop. The nature of these trades is if they work they work instantly. You have immediate follow through post entry so you can quickly move your stop to breakeven or to protect profits. Say you buy a momentum burst like this and it goes up immediately same day and is up 12% , you can quickly move stops to protect part of the profit. 

Even if 50% of your trades work you can still make decent money once you learn to manage risk. It takes some time to develop that skill but as these kind of methods produce frequent trades you can learn these kind of methods in 3 to 6 months in good market environment.

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 or next day as it happened in SRNE recently. But the key is to lock in gains once a stock starts moving.

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.

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. If you can do that then you will find around 400 to 1000 such trades in a year.

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