Source: Penny Stocks
Momentum Trading is a very popular day trading strategy among beginners, and for good reason. It combines the use of price movement and some sort of news catalyst. These two elements bring high volume to a stock and quickly changes the momentum of a stock
This strategy can be incredibly effective, and lead a high-probability of successful and profitable trades. But as always, you have to be careful.
Let’s look at an example: Blue Hat Partners, Ticker: BHAT
On May 28th, 2020, Blue Hat Partners put out a press release shortly before market open at 9 a.m.. They announced a partnership with a different company to launch Augmented Reality Classrooms in up to 1,000 preschools. At the time, the world was still reeling from Covid-19 and anything related to “getting back to normal” typically caused big spikes. So let’s take a look at the chart:
As you can see, starting at 9 a.m., the stock price started to significantly climb. The climb was accompanied by a large influx of volume at market open at 9:30. The stock spiked from $1.20 all the way up to $2.40 by 9:45 a.m.
That is a 100% increase in 15 minutes! Talk about momentum!
BUT, as you can see on the chart, just as quickly as it rose it began to lose momentum and gradually fell back to the $1.20 range by the end of the trading day.
For these kind of trades, you will usually want to target your entry as close to the news catalyst as you can. Your exit should follow whatever trading strategy % gain you are practicing. It’s always better to secure profits than to hold the stock into the negative thinking it will spike again.
It is also recommended to implement stop-loss trading strategies when Momentum Trading. Not all news catalysts will create a 100% runner, so understanding your entry and exit points before entering is always recommend.
Learn more about stop-loss strategies here!