Momentum Stocks: How To Find Momentum Stocks Using a Stock Screener

In order to uncover these stocks poised to trade higher, you need to learn the basics of how to identify a momentum stock. The squeeze momentum indicator helps traders identify periods of low volatility and predict potential breakouts in a stock’s price movement. Traders can use this indicator to enter or exit trades based on the stock’s momentum and volatility levels.

How to Find Intraday Momentum Picks

A few momentum investors prefer to use even longer-term MAs for signaling purposes. Using a free version of a stock screener can be beneficial for new traders to test the tools and understand their functionality before committing to a paid plan. Many traders consider the MACD indicator to be one of the most reliable momentum indicators. Especially at times when its movement diverges from the movement of price (moves in the opposite direction).

More news from Zacks

If you are interested in trading the best stocks in the market, you should consider signing up for The MEM Edge Report. My report is updated twice a week with carefully chosen stocks that I think are the best in the market. One of the most common ways to interpret momentum indicators is by looking for overbought and oversold conditions. When a stock is overbought, the price has risen too far, too fast, and is due for a pullback.

Choosing a Momentum Scanner

Crucially, one of the backbones of momentum trading is recognizing and leveraging volatility in the market. Volatility, in this context, represents the extent of price fluctuations of an asset. Momentum trading strategies usually target short-term market movements, making them versatile enough to align with various trading styles, from day trading to longer-term position trading.

In addition, traders use price crossing over the zero line for bullish or bearish signals.
Momentum investors look for stocks to invest in that are on their way up and then sell them before the prices start to go back down.
Traders can observe if the price moves faster or slower relative to its average behaviour in the past.
Momentum indicators are useful tools for traders to identify potential market trends.
For instance, the RSI may remain in an overbought zone for an extended period without a corresponding trend reversal.
With more than 800 top-rated stocks to choose from, it can certainly feel overwhelming to pick the ones that are right for you and your investing journey.
To illustrate how momentum investing works, let’s consider a hypothetical scenario involving Stock A and Stock B.
Momentum trading in the financial markets refers to a strategy where traders capitalize on the current direction of instrument prices, riding the wave of market trends to earn profits.

Trading Trends & Reversals

However, there’s also a less popular way to cash in on Wall Street via finding the best momentum stocks. There are several ways indicators can help identify which stocks have positive or negative momentum. Understanding how the momentum is trending in your stock position is valuable information. Robinhood is best known for its innovative no-fee brokerage approach, which can be credited with ultimately causing the entire online brokerage industry to drop commissions on stock trades. The Robinhood Gold subscription product also packs a lot of value for $5 per month and is becoming a big revenue driver, and still has massive potential. Market momentum indexes provide momentum indicators for various market sectors.

Kinsale had delivered a 36% gain year to date as of mid-April, but its momentum has essentially been going strong since its 2016 initial public offering (IPO).
U.S. Government Required Disclaimer – Commodity Futures Trading Commission.
Traders looking for promising momentum trades often aren’t very concerned with the true market value of a stock.
Then, take a closer look at each stock to figure out why they have performed so well, and whether there’s still upside potential if the company continues to execute on its strategy.
For example, many traditional liability insurers wouldn’t provide coverage for a demolition business; Kinsale would.
Another batch of momentum capital enters as the trade evolves, generating counter swings that shake out weak hands.
Momentum is used by investors to trade stocks in an uptrend by going long (or buying shares) and going short (or selling shares) in a downtrend.

Momentum Indexes

It is one of several indicators that can help an investor to follow price trends. For momentum investors, the most profitable part of the ride is when prices are moving at a high velocity. The ADX is a technical indicator that the renowned technical analyst Welles Wilder created. Wilder designed the ADX to, first of all, indicate whether a stock is trending at all – or merely ranging back and forth within a limited trading range. Thus, one of the main advantages offered by the ADX is that it can help investors avoid burning up their investment capital by being drawn into trying to trade a trendless market. Some stock scanners offer to simplify scanning for high momentum stocks with their own proprietary momentum indicator that combines several price action factors.

Surprisingly, these traders often have a losing-win-rate ratio, because they know how to catch this one big trade while losing most of the trades.
To identify centerline crossovers, traders often use the moving average convergence divergence (MACD) or the relative strength index (RSI).
Instead, they are focused on the stock’s recent and current price action – more specifically, on gauging whether its price action is indicative of a strong trend.
They are lagging indicators that compare the current price to averages over a previous period.
Momentum traders benefit from herd mentality, greed, and fear of missing out.
It is one of several indicators that can help an investor to follow price trends.
Day trading works well with momentum strategies, but it forces players to take larger positions to compensate for not having the greater profit potential of multiday holds.
Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

Closing price compared to range

Position management takes time to master because securities that are best for momentum trades often carry wide bid/ask spreads. Wide spreads mean you need more significant price changes to make a profit, and the large intraday swings can trigger stop-losses, even if the overall trend is still strong. Choose your holding period wisely because the risk increases the longer you stay in your position.

Momentum Investing Pros and Cons

Stock Momentum

The “MACD line” on the chart is calculated by subtracting the stock’s 26-day Exponential Moving Average (EMA) from its 12-day EMA. This line is compared with the 9-day EMA known as the “signal line.” When the lines cross, it signals a change in momentum. The MACD and RSI are both free indicators widely available on charting platforms. One of traders’ biggest mistakes when using momentum indicators is ignoring the market context. The market context includes overall market trends, news, and economic data. If you’re using momentum indicators in a vacuum, you will likely miss important market contexts that could impact your trades.

Investing in Momentum Stocks in 2024

Nvidia (NVDA 1.74%) is perhaps the most notable momentum stock in the market as of April 2024. Not only did it deliver a 58% gain for investors through mid-April, but the company more than tripled over the past year. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

Top five momentum indicators in technical analysis

The most popular fall into three categories, as explained in the following momentum indicators list. Momentum has a natural time element to it, so you have to think beyond today’s closing price and identify long-term momentum trends by investigating price and volume patterns in charts. Some of the best indicators that professionals use are free and available on almost every platform available.

It is important to use momentum indicators in conjunction with other technical analysis tools and market context.
Conversely, RSI numbers below 50 can point towards downtrend momentum, and values below 30 can potentially mean the market is oversold.
The Value Style Score utilizes ratios like P/E, PEG, Price/Sales, Price/Cash Flow, and a host of other multiples to help pick out the most attractive and discounted stocks.
META has a Momentum Style Score of B, and shares are up 15.4% over the past four weeks.
Alternately, the price could pierce the third or fourth standard deviation of a top or bottom 20-day Bollinger Band.
Using these indicators, you can identify trends, time your trades, confirm price movements, and diversify your portfolio.
Let’s use iconic electric vehicle company Tesla (TSLA) as a working example.

Traders use the stochastic oscillator to identify potential trend reversals and confirm a trend’s strength.
In the stock market, momentum trading looks to profit from investing in “hot” stocks – expecting them to stay hot – and dumping “cold” stocks, expecting them to stay cold.
Using momentum indicators to trade is about preference, strategy and the trading environment.
One of traders’ biggest mistakes when using momentum indicators is ignoring the market context.
Momentum shows the rate of change in price movement over a period of time to help investors determine the strength of a trend.
If it can continue to grow its e-commerce and financial services businesses, the stock’s momentum could last for a long time.
In terms of value, RSI exponential above 80 indicates that the stock has run up too much, whereas a reading below 20 indicates an oversold position.
Momentum indicators can be particularly helpful in identifying trends and determining whether they are strong or weak.

If two momentum indicators show the same thing, it could give the trader more confidence to take the trade. For example, traders are advised to avoid using a momentum indicator suited for sideways markets when a market is trending. Swing trading requires a different entry and exit approach than day trading.

The best momentum trades come when news of a shock hits, triggering rapid movement from one price level to another. In turn, this sets off buying or selling signals for observant players who jump in and are rewarded with instant profits. Another batch of momentum capital enters as the trade evolves, generating counter swings that shake out weak hands. The hot money finally builds to an extreme, triggering volatile whipsaws and major reversals.

Stock Momentum

In individual securities, market momentum for a particular stock can be driven by several factors. Positive momentum can be the result of increasing revenue, earnings, or sales. Positive momentum can also be influenced by a reduction in a company’s debt obligations and an increase in its projected cash flow. Negative market momentum can be caused by news about an industry, new government regulations, or changes in leadership at the company. It can also be due to waning popular interest in a security that became temporarily well-known or exciting. Investors and technical traders can follow several indicators to gauge market momentum.

This indicator, often overlooked due to its simplicity, is another essential tool. It compares the last closing price with a previous one, typically from 14 periods ago (although some traders use 30 periods for smoother signals). Using momentum indicators to trade is about preference, strategy and the trading environment.

Do momentum trading strategies work?

Free stock scanners are great, but they are very limited in what they can offer in terms of customization and functionality. If you are looking for an advanced stock Stock Momentum screener to propel your research in the stock universe. The Simpler Scanner has many features that can cater to your strategy and assist you in analyzing the market.

RSI Exponential 14D

Here are some frequently asked questions about the momentum trading strategies. It’s crucial to confirm the divergence pattern and not rely solely on the RSI. This strategy often works best in a trending market where the RSI divergence can signal a potential continuation of the current trend. Note that this article does not constitute financial or investment advice. Always conduct your own due diligence before trading, considering your attitude to risk, experience in the market, and portfolio margin.

MACD divergence is a signal of waning momentum and, therefore, of a possible impending trend change. In the stock market, momentum trading looks to profit from investing in “hot” stocks – expecting them to stay hot – and dumping “cold” stocks, expecting them to stay cold. Many momentum traders use momentum scanners to help them identify trades with the best potential for making a profit by comparing stocks against one another. Momentum in the stock market refers to the sustained increase or decrease in the price of a stock. In technical terms, momentum in a stock is a measure of the velocity at which the price of stock changes. The Relative Strength Index (RSI) is a critical tool in momentum trading, acting as an oscillator that fluctuates between zero and 100 on its scale.