Trading Long-Term Momentum With Price Surges

01/30/12 09:34:35 AM

by Billy Williams

Trading while working full time is a difficult task for the aspiring trader, but if you can spot price surges, you can still achieve higher returns.

Security: AZO, NILE
Position: Hold

Most traders look at smaller time frames or have a more short-term bias when it comes to trading, which is why they tend to look to momentum trading as being tailor-made for their own personal biases. However, if you do what everyone else is doing, then you aren't giving yourself the edge you need to outperform other traders.

But if you approach the market with a different view or method that exploits price in a way that the majority of other traders are choosing not to, you gain a secret weapon to achieve higher performance as well a chance for reduced volatility and/or risk exposure.

The reason you want to consider momentum trading on larger time frames is twofold: One, trades on a larger time frame have more lasting power, and two, they can be easier to spot and manage if you have a full-time job.

Newton's first law of physics states that the velocity of a body remains constant unless the body is acted upon by an external force. In trend trading, once the dominant trend is in place, then it is likely to continue unless it is acted upon by an external force. So, for example, the market is in a bullish run until the bears begin to take control and the massive selling causes a price reversal or causes price to enter a trading range.

In addition, ease of trade-management while still holding down a full-time job allows you to put yourself in a position to outperform the market while not being at the mercy of short-term volatility. If you have a trading approach that lets you spot where momentum is building in the price action of a potential runaway move and a system of trade management that locks in profits and controls your risk, then you have a method that can give you a momentum trader's potential for huge gains. See Figure 1.

FIGURE 1: AZO. In November 2008, Autozone bottomed to just over $84 before rising almost 65% in two months to just over $140 a share during an explosive price surge. AZO went on to trade higher and offer two potential price entries before rising to as high as $350, a potential gain of almost 100% in three years.

Graphic provided by: www.freestockcharts.com.

One of the more effective ways to accomplish that goal is to look for huge price surges within a confined period of time in a stock's price movement. For example, a stock that makes a 50% or greater move in less than eight weeks reveals a stock that is under heavy accumulation and is likely to rise, especially if it is moving upward and setting new all-time price highs.

The sudden surges in price show institutional sponsorship such as mutual funds or hedge funds that are buying up shares, resulting in a rise in share price due to the demand for those shares and the limited availability. This causes a frenzy of buying as the stock's price begins to rise and set new all-time highs in its price action. See Figure 2.

FIGURE 2: NILE. Blue Nile, an online jewelry retailer, bottomed in August 2009 before rising by more than 50% in two months and going on to more than triple in price over the following year.

Graphic provided by: www.freestockcharts.com.

Plays such as these are spotted on weekly and monthly time periods on price charts and can easily be entered as the stock sets up to trade through overhead resistance. Like an ocean wave that is gathering strength or surfers who have trained themselves to spot waves that are building momentum and putting themselves in a position to latch onto a move to ride its momentum into shore, you as the trader can do the same thing by trading these price surges on longer-term time frames even on a part-time basis while riding the stock's momentum to higher returns.

Look for stocks on weekly and monthly time frames on your price charts and take note of price surges of 50% or greater within eight weeks or fewer. Then enter the stock as it gathers strength and trades upward through old price highs while managing the trade using an adjustable stop-loss order just underneath price lows that are set during pullbacks.

Moves like these can last for a long time, as long as several months to years, but can put you in a position to gain 50%, 100%, or higher over time.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

Company:	StockOptionSystem.com

E-mail address:	stockoptionsystem.com@gmail.com
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Trading Long-Term Momentum With Price Surges

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