How to Capture the Market’s Biggest Momentum Moves
Last week, I promised to show you a few tricks you can use to book consistent gains buying fast-moving breakouts. Because when it comes to trading, the only things better than profits are fast profits.
We’re smack in the middle of our core trading system reboot during our regularly scheduled Monday strategy sessions. Our goal is simple: to focus on how we trade, including the specific strategies that have helped us bank repeatable profits.
Last week, we showed you the basics of selecting and timing the perfect long-term trade. Today, we’re going to discuss the forces at work behind breakouts — the short-term momentum moves we use to supplement our longer-term plays.
When it comes to short-term market moves, traders and the financial media like to toss around the term breakout. But no one ever talks about why breakouts work — and why identifying strong breakouts is the cornerstone to trading success.
It all comes down to supply and demand.
Short-term traders study the supply and demand of a company’s stock. These are the two forces responsible for the movement of every single stock that is traded on an open market. We study a stock’s price action to determine where those supply and demand levels lie.
Supply and demand are the only factors that directly impact a stock’s price. Even though fundamental factors typically cause an increase in demand (and in price), those fundamentals can often become out of sync with market prices.
Think of the recent market correction and volatility we’ve endured over the past several weeks. Both “good” and “bad” companies saw their share prices drop. And of course, you’ll also find stock in companies with strong fundamentals that are completely ignored by investors when the market is stable or moving higher.
But when you understand how supply and demand interact, you’ll no longer worry about these disconnects. Instead, you’ll know to use all the available market data on a stock to act on high-probability trading setups.
Here’s how it works:
For most investors, the most-natural thing to do after buying a stock is to watch how it moves in relation to their buy price. We’ve all been there. Seeing your position move into the green or drop into the red has a huge impact on whether you choose to continue to hold your shares or sell them.
These past prices are significant. They’re the prices paid by countless investors looking to make money. As a result, the decision making of those investors is based almost entirely on past prices.
We want to exploit these psychologically important prices. That’s why charts are a key component of the practice. Charts offer us a quick, thorough glance at price action. By analyzing certain formations on stocks charts, we can find the emotional pivot points that investors and traders have deemed the most significant. This is how our short-term trading opportunities are born.
Take a look at this simple chart:
Here we have a stock that traded between $76 and $83 since mid-December. Anyone who bought shares in 2018 had an emotional connection to a price somewhere between $76 and $83.
Remember, these past prices are significant because of the investors who bought at these levels. When the stock shot higher last week, these same investors were less willing to give up their winning position. This tightens the supply of shares while demand increases, helping the stock move higher. The opposite would happen if shares were to fall significantly below $76. Frustrated investors would probably sell, flooding the market with cheaper shares.
Remember, we’re not too worried about the company behind the stock, analyst ratings, or earnings. Only price pays! Short-term breakout trading allows you to forget about being right or wrong. We’re just looking to pull consistent gains out of the market.
Now you can see how analyzing supply and demand is a simple way to find high-probability breakouts to trade for short-term gains. Next week, I’ll build on this theme and show you the setups you can use to pinpoint your next short-term momentum play…