Learn to Trade Momentum Stocks

by Matthew R. Kratter

There are 3 possible signals that it is time to exit our position: If the stock falls 15% from your entry price, sell the stock immediately. This is our emergency stop loss, and prevents a small loss from becoming a big loss. A stock should not fall this much at the beginning of a strong uptrend, and so we do not want to stick around. Many readers have asked me: why such a wide stop-loss? The answer is that momentum stocks tend to be extremely volatile. Even daily moves of 5% or more are not uncommon, and so we need to have a fairly wide stop, in order to ensure that we are not shaken out by the natural volatility of the stock. If the 50-day moving average closes BELOW the 200-day moving average, sell the stock the next morning when the market opens. The trend is now over and it is dangerous to remain holding the stock! After a long trend has occurred, this will be the signal that it is time to take profits. Sometimes a trend will be weak, and the 50-day moving average will close below the 200-day moving average not long after you buy the stock. Exit the stock immediately, take your loss, and move on. If the stock rises 300% from your entry price, exit the stock completely and take profits. Some stocks will go on to rally another 200%, while some stocks will start crashing the next day. I have found that a 300% move is the sweet spot that allows you to capture most of the uptrend and book it as a profit, while not getting greedy and overstaying your welcome at the party.

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