As you saw in the video yesterday the single best indicator of likely outperformance in stock is momentum.
If you want to find stocks likely to make big move then narrow your trading universe to stocks with established momentum. Relattive Strength is just another name for momentum.
Momentum investing focuses on stocks going up or down faster than other stocks in the market. It allows you to eliminate slow movi ng or non moving stocks.
Momentum has been extensively studied and studies show that stocks with the best price performance over the previous 3-12 month period tend to continue to outperform the market over the subsequent 3-12 month period while previous losers tend to continue underperforming. The most celebrated study in the academic literature which documented this phenomenon was by Jegadeesh Narasimhan and Sheridian Titman in a study titled "Returns of buying winners and selling losers
Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
This paper documents that strategies that buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over three- to twelve-month holding periods. The authors find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years.
If you are convinced about need to focus on momentum then the next task is to operationalise it as trading strategy. The Stockbee Trend Intensity Breakout method detailed on this site shows you one of the ways to do it.
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