Momentum investing is one of the most popular strategies in modern trading. The basic idea is simple: stocks that are already moving strongly in one direction tend to keep moving that way. Traders seek to ride these waves of price action for profit. But finding the right momentum stocks is not as straightforward as just looking at a stock that went up yesterday.
After all, just looking at the highest-flying stocks would have you piling into the latest meme stocks like GameStop (GME) or NewsMax (NMAX) at the exact wrong time.
It requires a structured approach, combining technical analysis, fundamental awareness, and disciplined risk management, which is the approach that Mike Cintolo takes in Cabot’s momentum-based advisory, Cabot Top Ten Trader.
So, to get a better handle on exactly what you should be looking for as a momentum investor, let’s break down what momentum stocks are, why they matter, and how you can consistently identify them.
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What Are Momentum Stocks?
Momentum stocks are shares of companies that are experiencing strong upward price movement on heavy volume (stocks can also experience downside momentum, but given that we don’t recommend short positions, we’re not seeking those out). These moves are often fueled by catalysts such as:
- Earnings surprises (beating Wall Street expectations).
- Industry tailwinds (e.g., AI stocks today, GLP-1 stocks in 2021).
- News or product launches (a biotech firm announcing FDA approval).
- Institutional buying (big funds piling in; this is one of our favorite metrics to watch for here at Cabot).
Unlike value investing, where traders look for undervalued companies, momentum investing is about capitalizing on strength. If a stock is breaking out, the momentum trader doesn’t argue with the price—they follow it.
The Momentum Trader’s 7-Step Guide to Finding Opportunities
Step 1: Scan for Strong Price Movers
The first step in finding momentum stocks is scanning for the biggest gainers and losers. Your broker may offer a screener, but we generally like Finviz as a free option.
Here are some filters you can set:
- % Price Change: Look for stocks up more than 3–5% on the day.
- Price Range: Many traders focus on stocks priced above 10 for liquidity (and to avoid getting false-start signals from low-priced and low-volume stocks).
- Relative Volume (RVOL): An RVOL above 2 shows unusually high activity.
This narrows down the universe of thousands of stocks into a manageable watchlist of potential momentum candidates. Right now, this screen is producing 19 potential opportunities.
Step 2: Check Relative Strength
Once you’ve identified the day’s or week’s strongest movers, you want to confirm whether they have broader momentum beyond one day. Relative Strength Index (RSI) and moving averages are popular tools here.
- RSI: A reading above 50 suggests bullish momentum, while above 70 shows strong but potentially overbought conditions.
- Moving Averages and Price Highs: Momentum stocks often trade above their 20-day and 50-day moving averages. A stock making new 52-week highs is another strong sign.
In essence, we’re looking for a stock that is not only surging today but also showing signs of sustained buying pressure, especially from larger investors and institutions.
Step 3: Look for Catalysts
Momentum rarely comes out of nowhere. It’s usually tied to a story that fuels investor demand. Before entering a trade, check the news flow:
- Earnings Reports: Companies that crush earnings often gap up and trend higher for weeks.
- Upgrades: Analyst coverage can spark strong moves.
- Industry News: When one stock in a sector runs, competitors often follow.
- Macro Trends: Big themes—like AI—can drive sustained sector momentum.
Catalysts make it more likely that the momentum has legs.
Step 4: Confirm with Volume
Volume is the lifeblood of momentum. A price move without strong volume is often a false signal. Look for:
- Breakouts on high volume: A stock pushing through resistance with double or triple average volume is a classic setup.
- Volume patterns: Rising prices on rising volume suggest institutional buying.
In short: momentum backed by volume is far more reliable than momentum without it.
Step 5: Identify Entry Points
Even with a great momentum stock, timing matters. Jumping in too late can lead to buying the top. Common strategies include:
- Breakout Trading: Entering as a stock clears resistance levels.
- Pullback Entries: Waiting for a short-term dip toward a moving average before buying.
- Gap-and-Go: Buying a stock that gaps up at the open and holds its gains.
Set alerts or watch intraday charts for confirmation signals that align with your trading system.
Step 6: Manage Risk
Momentum stocks are fast-moving by nature, which means higher risk. Always plan your exit before entering.
- Stop-Loss: Place stops just below support levels or recent lows.
- Position Sizing: Scale your trade to match your risk profile.
- Profit Targets: Lock in gains on the way up—momentum can reverse quickly.
Many traders scale out of positions, selling part of their holdings as the stock climbs while keeping some to ride the trend.
Step 7: Track Market Conditions
Momentum thrives in bullish, high-liquidity markets. During bear markets or periods of low volatility, momentum strategies tend to underperform. Always zoom out and consider:
- Market Index Trends: Is the S&P 500 or Nasdaq trending up?
- Volatility Index (VIX): High volatility often means sharper moves—both up and down.
- Sector Rotation: Momentum often shifts from one sector to another (particularly relevant of late).
Don’t fight the trend.
Momentum Mistakes to Avoid
- Chasing after the peak – Buying a stock after it has already run 50% in a week without waiting for a pullback.
- Ignoring volume – Strong price moves without volume rarely last.
- No exit plan – Holding and hoping, as Mike calls it, hoping momentum continues forever or that a stock that’s cracked will rebound.
- Overtrading – Not every big mover is worth trading. Pick quality setups.
Finding momentum stocks is part science, part art. The science comes from scanning for price, volume, and trend indicators. The art lies in recognizing the stories, catalysts, and timing that separate true momentum leaders from false starts.
Momentum trading isn’t about predicting the future—it’s about identifying where the money is flowing in the market and positioning yourself to take advantage of it.
If you’re looking for help picking the market’s best momentum stocks, give Cabot Top Ten Trader a try. In it, Mike highlights 10 of the best-looking momentum stocks in the market every week.
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*This post is periodically updated to reflect market conditions.
