With a momentum strategy, an investor jumps on a stock whose price is moving up. Momentum stocks are rare and hard to find — only maybe about 10 out of 5,000 will fit the criteria in a given day, according to Warrior Trading. Look for these qualities in stocks if you’re using a momentum trading strategy:
- A major move in price, driven by catalysts like surprise earnings growth, a drug company’s discovery of a new treatment, or news that a small company will be acquired by a larger firm
- Stock movement of 30 to 40 percent
- Smaller stocks, which trade faster due to the reduced number of outstanding shares — the float should be under 100 million shares
- Trends or ideas for momentum trading through tools like StockTwits, a financial communications platform
To protect from oversize losses, Warrior Trading sets a stop-loss order just below the first price decline. The stop loss works like insurance: You place a sell order for the stock at a predetermined price, so if the stock quote falls to a particular point, the shares are automatically sold, protecting you from further losses.