How Trading Momentum Gives you an Edge - Part 3

Now that you have a better understanding of momentum and how we apply it in Bluefin, I wanted to cover some recent trades discovered using Bluefin.

The default scan in Bluefin, is called the Percolator. This scan removes overextended stocks from the daily selection by filtering on the following criteria:

- Day 1 Growth less than 4%
- Day 2 Growth less than 4%
- Day 3 Growth less than 4%
- Day 4 Growth less than 4%
- Volume Surge greater than 50
- Percent Change greater or equal to 2

The goal is to catch stocks coming off a 5 day or longer consolidation period. This is my primary setup and offers the best risk to reward. This scan is applied to all watch lists in the system, so when we are looking at results we’re looking at the best performing stocks in the best performing sectors that meet the criteria.

BBVA Banco Frances S.A. (ADR) (Public, NYSE:BFR)

Grupo Financiero Galicia S.A. (ADR) (Public, NASDAQ:GGAL)

Retail Ventures, Inc. (Public, NYSE:RVI)

For entry, look to enter the stock as it breaks to a new high over the consolidation period. If the stock has consolidated for 5 days, enter just above that 5 day high and use a stop at the low of the day. See my articles on Risk Reward trades and intra-day entry strategies.

Once in the stock, look at taking profits after 8% or greater move. We’re in a fast market, these stocks tend to surge over a short period so you have to be quick in taking profits. After we get a correction and market breadth normalizes, you can look at bumping up your profit targets to 20%.

Another method to control risk is to move your stop to break-even after an initial 4% move. If the stock fails to follow through, you are protected from any losses.

With investing, there comes risks. If anyone tells you otherwise, they are full of it. The major risk involved with trading momentum is, when the momentum leaves, it’s like a carpet being pulled out from under you. The stock will fall hard.

Amtech Systems, Inc. (Public, NASDAQ:ASYS)

Using strategies like profit targets and protective stops can mitigate the pain, but the most beneficial piece is applying some type of market breadth indicator such as the StockBee Market Monitor. This is why we have added the StockBee Market Monitor to Bluefin, to help keep you out during the risky periods and in the market during the rewarding periods. See my article on Market Timing Models.

Overall, Bluefin puts you in the middle of the action. Every day you’re seeing the strongest stocks in the best sectors breaking out after a consolidation. At this point, it’s up to you to go down the list and find the best setup each day. Happy Hunting.

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7 Response to How Trading Momentum Gives you an Edge - Part 3

October 26, 2010 at 5:50 AM

On average, how many stocks show up on this particular scan per day?

October 26, 2010 at 6:00 AM

yesterday, we had about 50. Depends on the day, if we get a lot of sector action you will see around that number. On slow days it will be a handful...25 or so.

October 26, 2010 at 7:44 PM

This is a great post and clarifies for me how the scans are used in relation to the watch lists. In the Bluefin screener, I noticed that market monitor shows the primary trend in yellow *or gold* is there a color coding system set up there?

October 27, 2010 at 2:28 PM

When market breadth reaches extremes on the primary or secondary indicators it will change to orange.

October 27, 2010 at 2:50 PM

I'm trying to figure out how to enter since I can't watch the market all day. I could use stop-limit orders but that is tricky because I don't know how many might get triggered.

October 27, 2010 at 3:49 PM

You say for Percolator the goal is to catch stocks coming off a 5 day or longer consolidation period. Yet it seems that a stock that has risen 3.5% for each of the last 4 days will qualify. Did I understand the criteria correctly?

October 28, 2010 at 8:00 AM

Peter, You can use next day entries and stops to protect against any losses.

The Percolator filters stocks with the last 4 days under 4% or greater moves. You will have stocks that are creeping up. This is where the visual part of reviewing the chart to decide if the stock is at a proper buy point comes into play.

At some point you need to be able to identify a proper setup versus overextended.

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