Hot Money Monday: Unleashing the power of momentum trading using these 3 signals
How to unleash the power of momentum using signals. Pic: Getty Images
- Momentum trading involves buying rising stocks and selling falling ones
- This works best during economic expansion, when market trends are stronger
- We take a look at three signals momentum traders use
Momentum trading is a popular investment strategy based on a simple idea: stocks that have been performing well are likely to keep doing well, while those that are struggling may continue to fall.
Essentially, it’s about capitalising on the strength of current trends – buying stocks that are on the rise and selling those that seem to be peaking.
Marco Santanche, a well-known quant strategist, explains it simply: “Momentum trading is about buying the winners and selling the losers because trends tend to persist.”
While the concept of momentum trading seems straightforward, its success varies depending on market conditions.
According to Santanche: “Momentum trading tends to perform better during periods of economic expansion.”
During these times, the market is generally thriving, making it easier to ride the upward trends of strong-performing stocks.
However, the strategy can be tricky when it comes to shorting, i.e. betting against, poor performers.
Stocks that are declining sharply may experience sudden rebounds, which can complicate the process. As Santanche notes, “Technical rebounds or quick recoveries can make it challenging to profit from stocks that are falling.”
Therefore, momentum trading works best when the market is broadly positive, allowing you to buy rising stocks and avoid or minimise exposure to those on the decline.
There are several momentum indicators traders often use, and here we look at three main signals used by the market:
- 52-week high
- Simple Moving Average
- Relative Strength Index
52-week high signal
Momentum traders often view the 52-week highs as entry signals.
This is due to what’s called the “52-week high effect”. If a price has broken out above its 52-week range, there must be some factor that generated enough momentum to further continue the price movement in the same direction.
On the other hand, if a stock is far away from its 52-week high, chartists believe the momentum will continue going that way.
10 ASX small caps nearest or at 52-week highs
(data from Commsec)
| Code | Name | Price | How far from 52-Week High? | 12 mth return |
|---|---|---|---|---|
| SDV | Scidev | $0.50 | 0.00% | 53.85% |
| VPR | Volt Group | $0.002 | 0.00% | 100.00% |
| MCT | Metalicity | $0.003 | 0.00% | 100.00% |
| VYS | Vysarn | $0.38 | 0.00% | 137.50% |
| VBC | Verbrec | $0.15 | 0.00% | -- |
| FEX | Fenix Resources | $0.42 | 0.00% | 29.69% |
| SCL | Schrole Group | $0.47 | 0.00% | 55.00% |
| KSL | Kina Securities | $0.99 | 0.00% | 20.12% |
| DCG | Decmil Group | $0.30 | 0.00% | 73.53% |
| SHA | SHAPE Australia | $2.39 | 0.42% | 63.70% |
Simple Moving Averages (SMA)
SMA is another indicator that can be used to gauge momentum.
SMA is often used to determine whether a stock price will continue in the same direction, or if it will reverse a bull or bear trend.
As a general rule, if the current stock price is above the SMA, the price trend is up. If the price is below the SMA, the trend is down.
10 ASX small caps at prices above SMA
(data from Commsec)
| Code | Name | Last Price Value | Price vs. Simple Moving Average | Price vs. 20 day SMA | Price vs. 50 day SMA | Price vs. 200 day SMA |
|---|---|---|---|---|---|---|
| ADY | Admiralty Resources NL | $0.01 | >5% Above SMA | 1 to 5% Above SMA | >5% Above SMA | >5% Above SMA |
| IMC | Immuron | $0.11 | >5% Above SMA | >5% Above SMA | >5% Above SMA | >5% Above SMA |
| APZ | Aspen Group | $1.97 | >5% Above SMA | 1 to 5% Above SMA | 1 to 5% Above SMA | >5% Above SMA |
| CYM | Cyprium Metals | $0.04 | >5% Above SMA | -1 to -5% Below SMA | 0 to -1% Below SMA | >5% Above SMA |
| LPD | Lepidico | $0.00 | >5% Above SMA | 1 to 5% Above SMA | -1 to -5% Below SMA | < -5% Below SMA |
| MYG | Mayfield Group Holdings | $0.85 | >5% Above SMA | >5% Above SMA | 1 to 5% Above SMA | >5% Above SMA |
| WNR | Wingara Ag | $0.01 | >5% Above SMA | < -5% Below SMA | < -5% Below SMA | -- |
| HCT | Holista Colltech | $0.01 | >5% Above SMA | >5% Above SMA | < -5% Below SMA | < -5% Below SMA |
| AVH | AVITA Medical, Inc. | $3.14 | >5% Above SMA | >5% Above SMA | >5% Above SMA | < -5% Below SMA |
| CCV | Cash Converters International | $0.21 | >5% Above SMA | 1 to 5% Above SMA | 1 to 5% Above SMA | 0 to -1% Below SMA |
Relative Strength Index (RSI)
The RSI is a measure of the strength of a stock’s momentum, either in the upward or the downward direction, and is used to indicate a stock price’s trend.
Generally speaking, an RSI above 70 means a stock is overbought and could get bought even more; and an RSI below 30 indicates that it’s oversold and could be sold even more.
An RSI above 80 meanwhile is strongly overbought, and an RSI below 20 is strongly oversold.
10 ASX small caps at prices with RSI Overbought signal
(data from Commsec)
| Code | Name | 2 Day RSI | 9 Day RSI |
|---|---|---|---|
| AVH | AVITA Medical, Inc. | Overbought | Overbought |
| LYL | Lycopodium | -- | Overbought |
| IMB | Intelligent Monitoring | -- | Overbought |
| RIC | Ridley Corporation | -- | Overbought |
| SMN | Structural Monitoring | Overbought | Overbought |
| TGP | 360 Capital Group | -- | Overbought |
| VMC | Venus Metals Corporation | -- | Overbought |
| WCN | White Cliff Minerals | -- | Overbought |
| MYR | Myer Holdings | -- | Overbought |
| ESR | Estrella Resources | -- | Overbought |
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