Momentum stock trading is the art of taking profits from the stock market with short-term trades designed to profit from a stock's upward or downward daily momentum. Many investors consider this to be a low risk trading method because, done properly and with discipline, you only enter a trade when the targeted stock's momentum is already moving in your direction.
There are a handful of key factors in successful momentum trading. This article looks at the importance of entry points. An entry point is the point at which you are willing to enter a trade.
Why bother setting specific entry points?
Quite simply, because you want to catch the momentum once it has started, instead of buying and hoping your prediction comes true. For example, let's say Stock XYZ closed at $58, with a recent hi/lo range of $55-60. Your research leads you to believe XYZ is poised to run up. Great! So you put in your order to buy first thing in the morning. But what if the stock opens at $59 and then drops down to $56? Now you've got initial downward momentum working against you and quite possibly, a losing trade on your hands. The key to successful trading on momentum is not playing around within the recent hi/lo range.
How do I select an entry point?
Setting an entry point above the recent hi (if you intend to go long) or below the recent low (if you intend to go short) helps you catch bigger, more significant momentum in your trades. In our example, Stock XYZ was showing resistance at $60, i.e. the price has not recently gone over $60. I would set an entry point at something slightly over $60, like say $60.30. By setting your entry point above the most recent resistance level, your trade will only trigger provided the momentum is already going in the direction you predicted.
In other words, your trade will trigger if the stock price's upward movement reaches your entry point of $60.30. Now you are in play and you have got momentum on your side and a winning trade to manage. If, however, there is initial downward momentum, your trade won't trigger and you have preserved your capital for other trades. Setting proper entry points is therefore essential to your success in momentum trading.