Copywritten by Billy Williams in 2006
Momentum stock trading has been around for a long time, and it has been shown to be a great way to make a lot of money on the stock market. During the 1990s, Clear Channel Communications went up 5,615 percent, Emulex went up 6,412 percent, Dell Computer went up 10,198 percent, Activision went up 13,819 percent, and Semtech went up 15,231 percent.
There are a lot of stocks that go up in price quickly and then make 100–300% returns in less than a year or even in just a few months. But for people who are just starting out as investors, it can be hard to find such stocks.
Even though there are many different ways for momentum stock traders to find tomorrow's big winners, there are usually six key steps to follow when screening for a big winner.
These are:
- Earnings or EPS that grow faster (earnings per share). 2) Earnings have gone up by at least 25% a year in the last three years. 3) The number of sales must be at least 100,000 or growing. 4) A return on equity (ROE) of at least 17%. 5) Plays a leading role on the market. 6) Price is at its highest level ever.
Stocks that could be good for momentum trading should have a strong balance sheet and show that they are growing quickly. You can be sure that a company is growing faster than average if you choose stocks with high EPS ratings and growth rates that have been getting faster over the past few quarters. Wall Street loves companies with fast-growing profits, and the big funds will sponsor companies with fast-growing profits, which will raise the value of their shares even more.
Momentum stocks have also shown that they are strong players in their markets and that they are worth buying by earning a lot of money every year. Less than a 25% increase in annual earnings won't get the attention of the big mutual funds or investors. This means that the price of the stock is likely to stay the same or go up too slowly for momentum investing.
Stocks that are being looked at should have an average daily volume of at least 100,000 shares or see their average daily volume rise as the price of the stock goes up. If the volume is less than this, it shows that investors aren't that interested, and you might have trouble selling the stock quickly if you need to get out.
A possible stock should have a return on equity (ROE) of at least 17%. ROE is the company's net income divided by how many shares investors own. It shows how well investors are taking care of their money, and the higher it is, the better for investors. I think this is one of the most important things about an investment in stocks.
Leaders in the market are also stocks with a lot of momentum. When the major indexes go down, strong stock leaders show their strength by staying near or even going above their highs. When the major indices go up, these leaders usually lead the way and keep going up, beating the market.
You should also trade momentum stocks at their all-time highs. By trading at these levels, which are key technical entry points, you are likely to be able to ride the trend as the price of the stock goes up. This kind of trait makes it more likely that you will make money because a trend that is going up is six times more likely to stay the same. This puts the odds in your favour.
You can use Yahoo Financial or MSN Financial to get free stock scans like these. Start keeping a list of possible candidates, and then keep track of how they do. With a little practise, you will be able to spot the stocks that go on to make big moves of 100% or more.
As with any type of investment, you should get rid of your losers quickly and hold on to your winners.
Good luck and trade well.
