I love trading stocks with high momentum. This means I prefer to trade stocks, ETFs, or indices that move quickly and significantly. If I’m investing money in the market, I want it to work as hard as possible. If you are like me, a solid strategy is crucial. Learning to trade momentum helps you find opportunities for big gains.
Momentum trading focuses on stocks that move fast and far. These stocks usually have a daily range of $1 to $2 in normal trading. However, when momentum kicks in, they can trend upwards by 20 to 30 points over a few months.
What Triggers Momentum Trading in Stocks?
Momentum can start due to various factors. Company news, such as earnings reports or new product approvals, can spark interest. Sometimes, institutional investors buying or selling in large amounts also cause momentum. Learning technical analysis helps you spot developing momentum. This way, you can profit from major moves in the market.
Why Post-Earnings Momentum Trading is Key
Holding a trade over earnings is risky. However, after earnings, the uncertainty about the stock’s direction disappears. I prefer trading after earnings because it brings high trading volumes. These volumes push stocks to move faster and further than usual.
Earnings reports often surprise the market. Sometimes, results are stronger or weaker than expected. Other times, traders wait for results before making big moves. However, the actual numbers don’t matter as much. What we trade is the market’s reaction to those numbers.
How to Identify Post-Earnings Momentum
Check the stock chart the evening after earnings are released. Look for signs of strong buying or selling pressure. If buyers are active, I trade it upwards. If sellers dominate, I trade it downwards.
One of my favorite post-earnings plays is Goldman Sachs (GS). This trade has worked out well many times this year. Tip: Keep an eye on this stock during earnings season.
Recognizing Momentum in the Post-Earnings Chart
Goldman Sachs released earnings in September and gapped above resistance. In my “Technically Speaking” workshops, I teach how to trade intraday charts. However, you can still profit without watching the market all day. The key is recognizing momentum on a daily chart.
Most momentum plays start with a breakout. Goldman formed a bullish Opening Marubozu candle on September 19th. The stock closed above the previous $155 resistance level. A close above resistance is a strong signal for upward momentum. After this signal, I confirm the trade using technical indicators.
If any bearish indicator appears, I avoid the trade. If all technicals confirm a bullish trend, I enter the trade the next day. Tip: News may move the stock for just one day. So, enter trades above the high (or below the low) of the earnings day.
Using this technique, Goldman’s entry point was around $159.75. The price chart and indicators signaled a bullish trend. Once in the trade, I stay in as long as buying pressure continues. Buying pressure often lasts three to five days. In Goldman’s case, momentum lasted three days. Then, the stock paused for three more days before rallying again. The technicals remained strong, keeping the trade valid. Over two months, Goldman climbed from $159.75 to $186.
Managing Risk with Gap Openings
Entering a trade after a price gap can feel risky. The risk is that the price action might have already happened in the gap. This means there might not be enough momentum left to push the stock further.
For example, when the Chicago Mercantile Exchange (CME) announced its acquisition of CBOT Holdings (BOT), it gapped to an all-time high. The opening price was over ten points higher than a long candle earlier in the month. However, after the open, no one wanted to buy at higher prices, and the stock quickly dropped.
A safer approach is to trade gaps only if they bring the stock closer to its recent trading range. In CME’s case, the stock was too far above its previous range. This led to quick profit-taking. Goldman, however, gapped to $155, a price where traders had bought before. This comfort level encouraged more buyers, pushing the stock higher.
How to Capitalize on Earnings-Driven Momentum
Earnings news creates fantastic trading opportunities. The momentum attracts more buyers or sellers, creating chances for profit. The key is checking technical indicators before entering trades. Make sure everything is bullish before buying calls or bearish before buying puts.
Stocks that gap to a familiar price level often continue moving. Enter the trade, set a stop loss, and let momentum work for you. This simple yet effective strategy helps you build your account during earnings season.
Final Thoughts: Why Momentum Trading is Worth It
Momentum trading is exciting and rewarding. It allows you to capitalize on strong price moves. By following a structured approach, you reduce risk and maximize profits. The best part? You don’t need to predict earnings results. Instead, you trade the market’s reaction.
By mastering post-earnings momentum, you set yourself up for consistent success. Whether you are a beginner or an experienced trader, this strategy can grow your account. Start applying these techniques today, and watch your profits soar!