How to Find the Best Momentum Stocks

The RS line, the blue line in the chart provided, tracks a stock’s performance vs. the S&P 500. The firm upgraded Norwegian Cruise Line to buy from neutral and raised its price target to 30, up from 20, citing its recent strategy shift. Carnival stock broke out as cruise lines rallied on strong momentum, with most set to report Q3 earnings this month. Investors can count on the Zacks Rank’s success, with #1 (Strong Buy) stocks producing an unmatched +25.41% average annual return since 1988, more than double the S&P 500’s performance. But the model rates a large number of stocks, and there are over 200 companies with a Strong Buy rank, plus another 600 with a #2 (Buy) rank, on any given day. Momentum traders benefit from herd mentality, greed, and fear of missing out.

Calculating Momentum

• There can be different interpretations of this value depending upon the absolute value of the MACD line 1.
• Other indicators can be used along with RSI to strengthen this conclusion.
• All three cruise line industry leaders — Royal Caribbean, Carnival and Norwegian Cruise Line — are based in Miami, which is on Florida’s east coast and well south of Milton’s projected track.
• The key here is to look for a rising ADX, which indicates strengthening momentum.
• While both strategies involve capitalizing on market trends, momentum trading specifically targets securities with strong recent performance, often over shorter time frames.

Its primary function is to generate buy and sell signals by identifying overbought and oversold conditions in the market. Using momentum indicators to trade is about preference, strategy and the trading environment. The momentum indicators listed above can be used for mean reversions, range bound markets and trends. How you use them for each market type could produce a different return on investment. The squeeze momentum indicator helps traders identify periods of low volatility and predict potential breakouts in a stock’s price movement. Traders can use this indicator to enter or exit trades based on the stock’s momentum and volatility levels.

• AKAM has a Momentum Style Score of B, and shares are up 0.7% over the past four weeks.
• Price Data sourced from NSE feed, price updates are near real-time, unless indicated.
• For example, many traditional liability insurers wouldn’t provide coverage for a demolition business; Kinsale would.
• Momentum indexes include the MSCI USA Momentum Index and the MSCI World Index.
• If the MACD line 1 has a negative value, it means the stock is in a downtrend.
• In this case, the 50-day crossing above the 200-day creates a buy signal, while a 50-day crossing back below the 200-day creates a sell signal.
• As a result, the investment in Stock A grows from $10,000 to $20,000, reflecting a remarkable 100% increase.
• The ADX is the average of the -DI and +DI, which are calculated from the comparison of two consecutive ‘lows’ and the respective ‘highs’, using the average true range (ATR).

Market Momentum Formula

A few momentum investors prefer to use even longer-term MAs for signaling purposes. Using a free version of a stock screener can be beneficial for new traders to test the tools and understand their functionality before committing to a paid plan. Many traders consider the MACD indicator to be one of the most reliable momentum indicators. Especially at times when its movement diverges from the movement of price (moves in the opposite direction).

MACD line 1 – Trend Indicator

The firm estimates that Norwegian could achieve 23% annual earnings growth over the next three years. That could stretch closer to 30% if the cruise Stock Momentum operator can sustain its 2.5% yield/cost spread. Either outcome equates to “big earnings upside and multiple expansion,” opportunities Citi wrote.

Momentum Investing Pros and Cons

Citi also upgraded Norwegian Cruise Line Holdings (NCLH) and opened a “90-day positive catalyst watch” for Royal Caribbean (RCL), as part of the earnings preview for the industry. A positive chart pattern named such because it resembles the outline of a coffee cup with a handle. The pattern can last from seven weeks to as long as a year, but most are three to six months.

Relative Strength Index (RSI)

Viking Holdings (VIK) jumped 2.6% Wednesday to clear a 37.25 buy point for an 11-week consolidation. Carnival Cruise stock vaulted 7% Wednesday to 20.20, clearing a 19.09 buy point for a cup-with-handle base. Royal Caribbean on Tuesday announced it changed itineraries for eight ships to avoid the storm.

Top Momentum Indicators

There is no single momentum technical indicator that fits all occasions. That’s why it’s essential to know different indicators and how to use them in different trading strategies. Finding the best momentum stocks can sometimes pay off for nimble investors. Momentum bucks traditional investing principles, yet research supports its merit. Reversal trading is a strategy that involves identifying potential turning points in the market and entering trades in the opposite direction of the prevailing trend. This approach can be more challenging, requiring you to accurately predict when a trend is about to reverse.

Sign-up for free to continue

However, the company has done an excellent job of moving forward, and investors were the beneficiaries of a 32% gain through mid-April 2024. Market Momentum highlights major market indices and market rates, and also displays a market momentum summary box. It is calculated as the difference between the MACD indicator and the signal line. A positive MACD line 2 value indicated that the MACD line 1 value is greater than the signal line value. There can be different interpretations of this value depending upon the absolute value of the MACD line 1.

Do momentum trading strategies work?

Generally, they look for stocks that are trading above their moving averages as a sign that they will continue moving higher. Alternatively, short-sellers look to capitalize on a stock that’s on a downward trend. Momentum investing can also be a popular strategy among professional investors such as hedge funds. Welles Wilder Jr. in the late 1970s; his “New Concepts in Trading Systems” (1978) is now an investment-lit classic. Once these numbers are charted, they can be compared to thresholds to see if the stock is oversold or overbought.

Reversal Trading

Perfect for day traders and active investors who want to stay ahead of the trend and make money. With a momentum scanner you can filter through thousands of stocks in seconds and find the ones that match your criteria, saving you time and improving your strategy. Overall, momentum indicators are powerful tools to help you make better trading decisions.

The following month, it climbs to $75; by the end of the third month, it reaches $85. The upward trend continues, with the price increasing to $90 in the fourth month, $95 in the fifth month, and finally hitting $100 in the sixth month. As a result, the investment in Stock A grows from $10,000 to $20,000, reflecting a remarkable 100% increase.

What is momentum investing?

In 2023, Meta’s operating income grew by 62% year over year thanks to double-digit revenue growth and impressive margin expansion. The business generated $43 billion in free cash flow last year, giving it plenty of financial flexibility to return capital to shareholders or pursue attractive opportunities as they arise. Meta’s social media platforms have almost 4 billion monthly active users worldwide and have a massive presence in the digital advertising industry, where the company makes most of its money. It has a dominant 75% share of social network ad spending and roughly one-fifth of all digital ad spending in the United States. Plus, the business has been (successfully) leveraging AI technology to improve engagement and content personalization.

Conversely, the index likely fell on the large downward moves below zero. The tax implications and the potential for commissions and other fees mean that buying high and selling higher does not come without its fair share of challenges. The second month sees it drop further to $40, followed by a decrease to $35 in the third month. By the end of the fourth month, the price falls to $30, then to $25 in the fifth month, and finally down to $20 in the sixth month.

It often requires frequent trading, sophisticated analysis, and the ability to closely monitor market trends—tasks that can be time-consuming and potentially costly for the average investor. This momentum strategy uses the Average Directional Index (ADX) along with a 200-period moving average on a daily chart. The key here is to look for a rising ADX, which indicates strengthening momentum. A trade is initiated when the ADX starts trending upwards, and the asset’s price breaks through the 200-day moving average.

With a solid Zacks Rank and top-tier Momentum and VGM Style Scores, AKAM should be on investors’ short list. Momentum investors should take note of this Computer and Technology stock. AKAM has a Momentum Style Score of B, and shares are up 0.7% over the past four weeks.

When the Green KST Line is above the Signal Line, it is a signal to buy, indicating a bullish trend. Conversely, when the Green KST Line falls below the Signal Line, it is a signal to sell, suggesting a bearish trend. By understanding the fundamentals of the KST oscillator and incorporating it into their trading systems, traders can make more informed decisions and improve their overall trading performance. We explain and test four popular momentum indicators for reliability and to deduce the best settings for traders. Momentum investing can be a great way to identify opportunities, but like any other investment strategy, it isn’t perfect.

Ignoring Market Context

In fact, in its worst year since going public, Kinsale still managed a 10% gain for investors. If you aren’t familiar with its business, Kinsale is an insurance company. Instead of providing coverage for everyday Americans, however, the company specializes in the unusual. Kinsale is a specialty insurer, focusing on property and casualty insurance for high-risk businesses and situations where it’s difficult to accurately estimate risk of loss. For example, many traditional liability insurers wouldn’t provide coverage for a demolition business; Kinsale would. It wasn’t too long ago that investors started to lose faith in Robinhood (HOOD -1.7%) after trust issues with the platform developed among retail investors during the meme stock frenzy.

• A value above 80 indicates an overbought situation for the stock, whereas a value below 20 indicates an oversold.
• History has shown that momentum is far more useful during rising markets than falling markets because markets rise more often than they fall.
• It’s crucial to confirm the divergence pattern and not rely solely on the RSI.
• We define momentum as the past 12-month return, skipping the most recent month’s return (to avoid microstructure and liquidity biases).
• Instead, it focuses on catching the wave of market movements, riding the momentum already established by prevailing trends.

They also demand a disciplined approach to risk management and an ability to interpret market signals accurately. It’s important to practice and become comfortable with the methods in a simulated trading environment before applying them in real trading scenarios. The MACD indicator compares a longer exponential moving average (EMA) with a shorter-term EMA to produce the MACD line, followed by a histogram and a signal line. The crossover of the signal line and the histogram is generally seen as an indicator of a shift in the market’s momentum, which could signal a change in the price trend.

Generally, pullbacks and breakouts are a big thing in momentum trading, largely because they provide a good entry opportunity during an ongoing trend. Jeff Reeves writes about equity markets and exchange-traded funds for Kiplinger. A veteran journalist with extensive capital markets experience, Jeff has written about Wall Street and investing since 2008. His work has appeared in numerous respected finance outlets, including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today and CNN Money. Relative momentum compares securities against peers to identify the strongest performers. Absolute momentum identifies one security’s inclination for momentum in isolation.

They help traders identify overbought (ready to fall) or oversold (ready to rise) conditions, gauge the trend’s strength, and signal potential entry and exit points. Crucially, one of the backbones of momentum trading is recognizing and leveraging volatility in the market. Volatility, in this context, represents the extent of price fluctuations of an asset. Momentum trading strategies usually target short-term market movements, making them versatile enough to align with various trading styles, from day trading to longer-term position trading. The key is to identify the asset of interest, devise a strategy based on technical analysis and indicators, and then execute trades in live markets. There are several momentum indicators that technical analysts can use in momentum trading.

Watch for the “flavor of the day” when new products, divisions, or concepts capture the public’s imagination, forcing analysts to throw away calculations and recompute profit estimates. Biotechs and small to midsize technology companies create a generous supply of these story stocks. Royal Caribbean stock popped 5.3% Wednesday to a record high, adding to its 49% gain this year through Wednesday’s close.

However, the train moves but at a higher velocity because all of the momentum built up from accelerating is propelling it forward. They will get out and leave you and other unlucky folks holding the bag. If you do manage to time it right, you’ll still have to be more conscious of the fees from turnover and how much they will eat up your returns.