FAQ

These answers are written for those who are new to trading.

What is momentum trading?

Investopedia defines momentum trading as this:

In momentum trading, traders focus on stocks that are moving significantly in one direction on high volume. Momentum traders may hold their positions for a few minutes, a couple of hours or even the entire length of the trading day, depending on how quickly the stock moves and when it changes direction.

Momentum traders take their positions with the expectation of the stock making a quick and significant move in price. Their goal is to get in just as the stock makes this move in price, and to sell before the move ends, or until they have reached their desired profit. They make their predictions using price action and technical indicators. The trades are short term, but the exact time frame can vary. Some trades can last under a minute, while some can last several weeks. This depends on the expectations of the trader, the stock and market conditions.

How do I trade your picks?

The trade ideas we post in our newsletter are not buy or sell recommendations. They are posted for educational purposes. Trading is risky, and it is therefore up to each trader to do their own due diligence. Should a trader decide to make a trade that we have posted, they should use their own entries and exits based on their own trading style. If you are new to trading, then we suggest that you use our selections to paper trade and develop a style that best suits you. There are some good online stock simulation programs that can help you develop your own trading style.

Why do you wait to buys stocks at higher prices? Aren’t you supposed to buy low and sell high?

There is a market proverb which states that “the trend is your friend”. Generally speaking, stocks that are moving higher usually continue moving higher, and stocks that are moving lower continue moving lower, until the stock or the market fundamentally changes. So although it may seem like good idea to buy a stock that is moving lower, and selling a stock that is moving higher, this strategy usually doesn’t work out well.

The hard-to-accept great paradox in the stock market is that what seems too high and risky to the majority usually goes higher and what seems low and cheaper usually goes lower - William J. O’Neil, How To Make Money In Stocks

Momentum traders often look for fundamentally strong stocks that have already made big moves, and are presently resting, or are in a consolidation period. In this consolidating period, stocks pull back and rest as they prepare for their next upward move. The smart money, the institutions and insiders, know the story behind the stock and are not selling. This is what prevents the stock from giving back all of its gains. Without any sellers, the stock price will eventually move higher again. This attracts new interest in the stock, sending prices even higher yet as buyers rush in. Momentum traders often looks to get into a stock just as the stock make this next move, and out before the rally ends.

Which broker should I use?

We don’t recommend a specific broker, but active traders should use a discount broker with low commissions, otherwise the commission costs will eat into your profits. You can try Interactive Brokers, MB Trading, TradeKing or Zecco.com.

Where can I learn more about momentum trading?

Check out our list of Recommended Reading material. The Education section of this web site also has some great lessons that can help improve your trading skills.