Identifying momentum stocks requires observing a combination of indicators along with price structure. The price movements give subtle hints and we are supposed to catch them. For a trained eye it becomes all the more easier. To develop the same, view at least 100 stock charts daily for over 3 months. You will be surprised by your speed after this practice.
Identifying momentum in a stock requires observing the volume and oscillators. Consistent high volumes as compared to previous days can give a good indication. This observation should be coupled with RSI and price structure. E.g A moving average crossover with volumes can be considered as short term bullishness for that timeframe.
2. OI spurts
OI spurts in futures is also a good way to observe momentum, however it needs to be combined with other techniques mentioned here. One needs to observe the price structure as well as a moment indicator like RSI. OI spurts without volume can also indicate false moves.
A variation of viewing OI spurts is the see the percentage increase, which can give a higher probability.
3. Moving averages
Most important moving averages include 200, 50 and 20. Many traders have tweeked these basic moving averages as per experience. For example 21 DMA is used by many. Similarly 09 DMA.
Moving average crossovers are important from the perspective of trading. A 200 DMA is considered to be very important of a lower MA is performing a crossover.
4. RSI ( Relative Strength Index ) as momentum indicator
RSI can help one know, when the stock is in momentum. Usually RSI above 60 can show good momentum, however please do check price structure also.
RSI can cross 60 with fast momentum. However, that is not the right point to but. You should wait for it to retest 60 again. Any weakness will bring it below 60 with the same momentum. Thus you should be confident regarding strength before entering.
5. ADX (Average Directional Index )
When ADX + crosses the ADX line, it is considered to be bullish. However, not all crossovers can be considered as bullish. Watch for the signal line to reach 25 levels.
Other indicators like volume, RSI, price structure can be a good confirmations.
6. MACD crossovers
A bullish MACD crossover is when the signal line crosses above the MACD line from below. The same is reverse is true for a bearish crossover. A crossover taking place above 0 line provides more confidence with respect to a bullish movement. Similarly a bearish crossover below 0 line indicates a bearish movement may begin.
MACD histograms and comparison with previous periods can also add to your probability of success.
However, MACD signals should not be interpreted in isolation. For example MACD may show a bullish crossover when RSI is about to cross 60 levels. Another scenarios may be when there is a moving average crossover too of 20 EMA moving above 50 EMA.
7. Price crossing previous high
Price structure is very important and gives early indication of high momentum areas. Specially when price is crossing above the previous level. Also, price will make higher highs and higher lows.You should be watchful of RSI at this stage. Most likely the RSI would also be near 60 levels indicating momentum.
8. Wrapping up
Please read up more regarding the above mentioned points and observe in charts before starting with small test trades of 2–3 stocks. Books by Dr. Murphy are really good. In addition, videos by Rayner Theo on Youtube is a good learning resource. Increase your purchases once confidence is built. However, always keep a stop loss.
Remember that practice is the key. Make it a habit of observing charts at the end of every day and you will be quickly surprised with your ability to predict price movements.
Q. What are the best scanners to identify momentum stocks?
Ans. The best scanners to identify momentum stocks are Trading view and Chartink. We have used them extensively and found them to be excellent.
Q. What are the best indicators to identify momentum stocks?
Ans. The best indicators to identify momentum stocks as per our experience have been Volume, RSI and moving average crossovers.