“This is a great time to be a momentum trader, because we love volatility. We have the perfect market volatility for active traders to make money,” says top trader and popular YouTuber Vivek Bajaj, who runs market analytics platform StockEdge.
In the last one year, Dalal Street’s fear gauge India VIX has gyrated wildly between the high point of 31.29 touched on June 25 last year and this month’s low of 10.60. This non-linear graph is full of ups and downs. Calculated on the basis of the order book of Nifty Options, a higher India VIX shows a larger number of traders expect volatility to rise in the next 30 days.
“Higher volatility gives more opportunity to find trading structures in the market. Ideally, a momentum trader would like to enter a trade as early as possible after a news shock hits the underlying security,” says Zerodha co-founder Nikhil Kamath, who has been a trader since the age of 17.
Momentum trading strategies
So how do they spot short-term momentum trading opportunities? Analysts say one should try bottom fishing by entering and exiting a trade ahead of the crowd.
“In bull markets, stocks mostly trend upwards, but there can be some pullbacks. Such movements offer great entry points. Exit when the trend suddenly gets overheated. If a sector is in momentum, more often than not, majority of the stocks in the sector will witness a rise. A momentum trader can expect a 10-15 per cent upside in such cases,” says Nirali Shah, Head of Equity Research at Samco Securities.
While assessing core strategies, momentum traders should keep one eye on the media and other on the crowd before jumping in on a bet. For instance, the USFDA began inspection of Indian pharma manufacturing sites in late February 2021 and that marked the bottom for the pharma index in the short term.
Bajaj says the ideal strategy for swing traders should be to adopt a mix of both fundamental and technical, or techno-funda analysis, to identify stocks.
“Make a list of stocks whose businesses you understand. And as you keep tracking prices, volumes, delivery percentages and technical indicators like 50-day or 100-day moving averages, you will develop comfort with those stocks, both technically as well as fundamentally,” says the Kolkata-based third generation trader.
For example, when a fundamentally strong stock with good ROE (return on equity) shows strength in price and trades above its 21-period moving average, it could be a good momentum play.
Running screeners to study the relative strength momentum, price breakouts, MACD indicators, weekly highs and lows, etc is a common strategy.
“Momentum trading or swing trading is best done in stocks where there is a high chance of buildup of positions. It’s like a car race, where one should bet only on the car whose speed is high and is also performing better than others. This is the concept of relative strength,” says Bajaj.
Some traders feel buying past winners and selling past losers is an infallible approach. But this strategy doesn’t always work always. For instance,
was in momentum from October 2020 to mid-Jan 2021, after which it has gone into a consolidation spree.
“Strong volumes, good sectoral participation, rising open interest and media boost combined make for an ideal situation for one to enter a trade. But one also needs to consider the sectoral move before jumping into individual stocks. Sectoral breakouts are powerful tools in themselves to identify opportunities in individual stocks, which otherwise wouldn’t be as effective the other way around because the probability of hitting a stop loss is lesser than making profits,” Shah says.
Kamath’s advice to Robinhood traders is to build a system for themselves and stick to it religiously. “A trading system can be a more customised process for a trader, which he/she can build using their personal biases or views. But back-testing your strategies and a stable temperament to be firm with your trading rules when a trade plays out is where every trader is truly tested,” says he.
