Julie, . . . . . . . On Momentum Trading. . . . . .
I am generally NOT a momentum trader. . . though now and then, when the markets are not cooperating with my long-term positions, I will participate. There are many things to consider when trying to read a momentum play.
When evaluating whether short-sellers have moved into a stock in a major way. . . . the primary defense and most obvious method is to make sure you are monitoring their chat rooms. When we are playing volatile issues it is especially important to watch their rooms for signs of interest. . . .you can do as others do and partner with a few other long traders to monitor various such chat rooms and notify one another of important positions taken. . . this is very effective. . .and is your best early warning method.
As for reading time and sales. . .the most obvious sign is when after long periods of regular trading. . . suddenly large amounts of trades begin occurring on ECNs or overseas accounts. . .generally indicated by a black background and less trade info. . . . this is a less effective early warning for those without access to short chat rooms. . .
The next in line would be watching for the stock to be boxed in. . . this is tricky to see. . .because it requires large size buys and sells. . . .so you may think that just because there is large size on the bid. . .someone wants to buy. . . but in effect, they are merely boxing in the price to regain control and force the stock to become liquid. . . .you have seen it many times. . . .on intraday charts. . .where a stock will be swinging wildly, then it starts to move up and hits a brick wall at a particular price. . . then the spread changes from a quarter to an eighth to a sixteenth to a thirty-second. . . and the stock begins this long sideways movement, which appears to be going nowhere.
The trick is in reading the true direction of that sideways movement. Using a plotter. . . check the price carefully to see if there have been minute downticks over a long period of time. . . or have there been upticks. . . from a distance. . .the movement can look totally flat. . . but blow it up. . . I do this by sliding the intraday to the left. . . are shorts winning this battle or losing. Write down the money flow at the point where the box starts. . . and watch the direction of money flow. . . this will also help to give an indication as to whether the shorts are still in control, or whether they are losing their grip.
When I see that long "aircraft carrier" as Kevin puts it. . . starting to bend downward. . . I know it is just a matter of time before they will see a dump. . .and I'll trade accordingly. . . . .but if I see the short-sellers losing their grip I get excited. . .especially when volume is impressive when compared to the float of the stock [which you should ALWAYS know when playing any momentum. . .like perhaps more than a quarter of the float of a small float. . . or more than 10 percent of the float of a large float issue]. . .and when the volume rate and trade rate are holding strong. . . .when I see that bend northward, I like to call it a dogpile. . . because long momentum players are seeing this and piling on with their buys to force the short-squeeze . . .
This is also the one thing that scares shorts most . . especially on the tiny float stocks [which are most fun in momentum trading]. . .because there is no ceiling. . . a stock can only go to zero on the down side. . . but there is no ceiling to a stock price. . so shorts can not only lose everything, they can start to OWE the house. . .[very dangerous way to play markets]. . . . which is why the experienced traders we have seen on these boards, that have lost everything in recent months have been short-sellers. . . . remember November? remember December? . . . .garbage stocks were flying up 1, 2, 3 hundred percent or more. . .with many ex-short-sellers in tow. . . margin calls put an end to their trading days during those two months. What a tragedy.
But that is the risk that short-sellers take when jumping into a momentum play on a low float stock too soon. . . perhaps the very riskiest play you could make with stocks. . .outside of playing options, etc. Jumping in too soon on a low float momentum is most often due to arrogance on the part of those calling the play. . .they get an artificial feeling of being invincible.
And it is the smaller short-sell players who generally lose everything in such plays. . . .remember, when those margin calls come in. . .forcing your cover. . .the game is over.. .. the stock might drop as you thought it would, but you still lost the trade and must now pay the broker.
Note: One day, we hope to have a more accurate accounting of time and sales. . .showing whether a trade is a short-sell or cover of short-sell. . .a real-time short-interest indicator. . .the status of ALL offers and bids, specifically those that get removed. . .and even real-time news/earnings [when market makers & analysts get them] to take away important advantages market makers currently have over individual investors.
Back to T&S. . . another thing to watch for are bursts of dozens of small size sells on T&S coming within just a few seconds of one another. . .when momentum hits the sell side. . . daytraders are jumping out with both feet. . . [they sell 100% of their positions on momentums]. . . so any decisions to sell should be made during the early warnings. . .
So what, if you miss another leg up?. . . take those profits when you have them and NEVER let short-sellers walk up and take them from you. . .that is a suckers play.
When I referred to "Ask volume". . .I was talking about the amount of selling volume and whether it was slowing down or not. . .you can likewise count up the volume on the ask and keep track of it in comparison to the size on the bid. . . but that will drive you nutty. . . keeping an eye on sell volume and rate can be a good early warning to "when" the short-sellers will probably begin to lose control. . as their position softens. . . .which can then be verified by the tiny upticks. . .keep good notes during such plays. . .they can come in handy.
Watching which side of the trade certain large volume Market Makers are on is also important. For this, you will need Level II. There are certain Market Makers that tend to drive certain stocks. . . when playing momentums, this can be an important trading factor. . . as you don't want to find yourself playing against the largest positions that are driving the stock.
With recent CBMI, SCON, CYTO, etc. or older WRLS, ASDS, VPHM, and the like. . . the play was not so much to jump in when the stock had momentum. . . but to WAIT until the shorts had fully boxed it in and had stretched it out as far as they could . . .to hold up that money UNTIL they begin to lose control. . .then the dogpile forces the squeeze often sending the stock higher on the second run than even on the first.
This is one of the many developing strategies that long momo players have been using to make sure that short-sellers do not win momentum plays anymore. . . especially the low floaters. . .and BOY! does it ever work well!
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Very important to remember is that if you WAIT to enter a momentum play until AFTER the initial runup, you have already eliminated quite a bit of risk in the play. . . and by then evaluating whether further momentum is up or down, you can make a clear-headed decision as to whether to risk some capital in the play or not. . . with a good sense of future direction, but without the hasty decisions made when the stock is most volatile.
I referred to monitoring the marginability of such issues. . . during that stretch. . often times on low floaters, one or more of the most popular brokerages will begin to show the stock as "not marginable".
At this point, most short-sellers must call to and fro to find borrowable shares. . . this is another area where your trading buddies can help you out, while you help them. . . monitor ABWatley, MBT, Datek, ETrade, etc. . .make a list of the most used for short-sellers.
Remember, those that have offshore accounts will continue shorting . . .[incidently, they often trade just a sixteenth at a time. . . .trying to wear down the longs . . though these days longs are smarter than that and are just biding their time]. . .much of the shorting going on when a stock shows "not-marginable" is naked . . meaning, they are not bothering to borrow against actual shares. . . .which, contrary to popular belief. . .is not against the laws of many countries. . . which is why larger short-sellers trade out of offshore accounts. . . .while you would think it illegal for an American to trade American stocks via an offshore account. . .it is not. . . [yet?]
So it is at this point, where an issue is no longer marginable from the most popular brokerages for U.S. traders. . .that the stock is the most vulnerable. . .some even panic and run to cover. . . .and it is at this point, coupled with their losing control of their box, where I am most interested in STARTING my momentum plays!!
Now, nobody can make a "concerted effort" to force such a squeeze. . .which is why nobody here will ever "call" such. . .since that violates Securities Regulations. . [any "concerted effort" by a group of traders to force a price to move one way or another is a securities violation]. . . . but as an individual trader. . . knowing what to watch for, you can choose to make your own play. . . and monitoring when the stock becomes non-marginable is a natural indicator of when to make the play.
Of course, knowing who is making such a short play, and following their calls is the easiest of all such plays. . . .but each long momentum trader needs to know all of the above strategies. . . and I am hardly a seasoned pro at momentum trading. . . there are far more knowledgable than I [as I have said] at momo trading. . . . however, the plays I am discussing here, you will not find in any book.
Now keep in mind when playing momos. . . that shorts are likewise watching trade rates. . .when buy volume begins to dry up, they move into a deeper position. . .so you must stay aware of both perspectives. . .and place your trades accordingly.
Never stop re-evaluating a momentum trade.
And the moment it sours, bail. . . there will be plenty more to come. Never be a martyr. . . that is why we never get emotionally involved with any stock. . .and especially not a momentum play. . . who cares about their news or their products or their earnings or their valuation?
A momo is a momo. . . nothing more.
If you try to MAKE anything more of your momentum play, you will lose.
Also, the after hours markets are now made up mostly of sharks. . .so never assume that your stock will rise during after hours. . .no matter what it did during the day, it will probably fall during after hours. . . at least at some point [so plan for it]. . . and there are many seasoned vets that ONLY play in the after hours. . . just waiting for the less experienced to show up and buy or sell their stock at the wrong price. . . .many are even playing the arbitrage on the spread. . . which is another of those grey areas that should probably be illegal, but is not. . . so buyer beware.
Now our "timing plays", which we have not played on the HOME thread since last spring. . .are a different sort of momentum play. . .they are where during times of extreme volatility, you take position in your favorite tiny float stock near its 52-week low BEFORE momentum hits, by buying when nobody is watching and hiding out there until the stock gets noticed, which can take days, months or even years. . .then as soon as momentum hits it, your alarms go off, your Good-Til-Cancelled limit sells fire off. . . and you are selling into the buying. . . this is a unique way to play momentums. . .or should I say pre-momentum?. . . check out William Jepsen's "Rat Dog" thread,where this play has been perfected. . . thanks to William's expert instruction.
Lately, momentum plays have been gapping up the following day after being stretched out from a morning run. . .again, before taking your late day [or after hours] positions, be sure to evaluate the money flow. . .and figure out who is in control of the play. . . these days, even news can be a non-issue. . .momentum is more important. Take everything into consideration.
Remember! If you are not a seasoned momentum trader. . . do not play around with momos . . it is a sure fire way of losing your money!!
Finally, a long history of successful paper trades are what is required in becoming a successful momentum trader. That, and a nice stretch of volatility, like we have been seeing of late.
Personally, I found the Yahoo Challenge to be most effective, because in order to stay competitive, you were forced to place your entire account on a single stock as a day/swing trade. . .with a 15-minute delay from the time you place your trade until the time it executed!! . .making day/swing trading nearly impossible, because it forces you to calculate where the price will most likely be 15 minutes into the future. . .that is your buy / sell price. . . . .not to mention, you are playing against about 30,000+ other traders.
So let me tell you. . . staying in the top 10 for an entire month is perhaps the biggest momentum challenge of all. . . I believe I was number 1 for 20 out of 30 days. . . until K-TEL knocked me down a peg. . .I can't bring myself to trade that stock on paper, let alone in real world.
But I will never forget the feeling of being 4th on the final day of trading when only the top 3 positions were going to end up in the money. . . the last thing I needed was a lousy 4th place T-shirt, when I owned a clothing company. . .so I was forced to make every desperate trade I could. . . and nothing was moving that day. . . I must have made two dozen trades that day trying to find an up elevator. . . but could not move into third. . .still it was a thrill turning $100,000 into $1,000,000 in a single month on Yahoo Challenge . . and I learned a ton about momentum trading there.
Anyway. . .I hope this article sheds some light and illustrates the multiple complexities of momentum trading, as well as just a few tricks being used these days.
Rande Is |
