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Momentum Trading with Penny Stocks

As part of our Penny Stock Investing Strategy Center, this page will explore the use of Momentum Trading. We will define momentum trading, explain its use, and show you its pros and cons when working with penny stocks. Please be sure to check out our other trading strategy pages. With our help you will be on course to finding your niche in penny stock trading!

Day Trading

Swing Trading

Momentum Trading

Technical Trading




What is Momentum Trading?

Momentum Trading is a strategy many traders use to profit from stocks that are moving quickly, and on high volume in one direction. With penny stocks, traders play on upward momentum, since penny stocks are not generally available for short sales. Stocks gain momentum because of buzz; expected news, filings, or rumors. To find stocks with this “buzz”, a momentum trader reads message boards or forums. One can usually find several stocks getting a lot of attention, a sign that traders will be playing the stock heavily in hopes to drive the price in one direction, and take a profit before the party is over.

After creating a list of these hot stocks, one should research and watch that stock’s trading activity before jumping on board. Stocks that have great momentum potential are ones with higher than average volume, stocks that are moving opposite to, or much higher than the general market. Momentum should be confirmed by watching the price action, Level 2 quotes, and using charts. Several technical indicators can be used to show building momentum, some of them are the Momentum Indicator itself, RSI, MACD, OBV, and many more. Since momentum trading relies so heavily on Technical Analysis, one should learn, at the very least, basic technical trading knowledge. One of the best places to start learning is ChartSchool at Watch the Level 2 to spot a building bid, or for offers on the ask to disappear. This is the first definite sign that a move could occur.

Trading Course

After the momentum stock has been identified and confirmed, it should be bought quickly at the best asking price, or in the case of a very large order, slightly above the best ask to ensure a complete and fast fill. Now the trader needs to be glued to the screen, constantly scanning charts and watching for any unforeseen news or filings. If any negative trend, indicator, or news develops, a quick sell should be considered to cut your losses, and move on to the next potential stock. Holding and hoping rarely pays off. As with all trades, don’t let emotions take over.  If the momentum continues, and you find yourself in the green, hold on and watch your charts and Level 2 screen. When the offers on the ask start to pile up, or bids start to thin out, it is time to take your profit and move on. The stock may continue to rise after a breather, but the wise move for a momentum trader is to take the profit while you can!

Momentum Trading Pros:

  • Penny stocks are often the most explosively moving stocks when momentum builds, leading to potentially huge profits in little time.
  • There are plenty of penny stock forums and message boards to scan and find “hot stocks"

Momentum Trading Cons:

  • Penny stocks can be so volatile that your selling opportunity can be very short lived.
  • Companies with dilution agendas can quickly stall out any potential momentum run.
  • People with agendas on forums and boards can hype up stocks and orchestrate runs to sell a large position. Once out, they simply disappear leaving you with the bag.

Momentum Trading Resources:


Momentum Trend Trader EBook(R) & Video. Easy To Spot Buy/Sell Signals For Emini S&p, Dow, Qqq, Stocks Forex.

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