How to Pick Momentum Stocks

Jul 26, 2021

Brijesh Bhatia, Research analyst

In my video today, I'll share my momentum trading strategy with you.

Many of you have watched my previous videos and asked me to do one specifically on momentum trading.

So here it is.

In this video, I'll explain my strategy using point and figure charts. I'll also show you how to shortlist stocks for momentum trading.

Watch the video and let me know what you think about my strategy. I would love to hear from you.

Hello viewers. Welcome to the Fast Profits Daily. Myself Brijesh Bhatia.

Well, in the previous videos, where I have shared my strategies on the index, many people have commented that they want to know how to select stocks for momentum trading.

I'll share my trading strategy, my two patterns, which I generally use for stock selection on momentum trades. So let's look at what are those two setups. Here, I'll be doing my stock selection setups on point and figure charts. So if you look at the screen there are bullish and bearish. Points and figures are measured in Xs and Os. So the rising prices forms the Xs and the falling prices forms the Os.

Now it depends on what kind of structure you're using. So there are three types of structures generally used on point and figure. First is percentage based moves. Second is absolute based moves. Third is ATR based moves.

So in this video I'll be using percentage based systems and I'll be sharing my two patterns I generally use. The two patters which I'll be discussing is Super Pattern and Triple Top & Triple Bottom.

Super Pattern is defined by Prashant Shah. He has written the book on point and figure. Do read that book. It's an interesting book. You will definitely learn a lot about point and figure. First let us look at Super Pattern.

So what is Super Pattern? After a certain rally, stocks or any instrument, consolidates in the form of Os and again the pattern resumes with the breakout of the previous highs. So basically, if I look at the traditional tending pattern, we generally look at flag or pendant. It's similar to that.

After a certain rally where the pole is there, a consolation takes place, and again, a follow-up buying happens with the resumption of the previous high breakout, which is known as a Super Pattern or in short, a double top pattern.

In double top we look at the previous high being taken out. In Super Pattern, as certain rally, it happens. Similarly, on the opposite side. Bearish Super Pattern and Super Pattern. Now low at this chart. This is the L&T chart.

After a certain rally, it consolidated, resumed its bullish momentum, consolidated, resumed its bullish momentum in the form of a Super Pattern.

Now the advantage of a Super Pattern is, you get smaller stop losses versus the bigger targets. So generally, as we trade in flags, the consolidation part, when it breaks out, we take the target as a pole.

In a similar pattern, we are taking the poll as a target. So it depends what kind of pole. If a pole size is Rs 50, you can take 50% i.e. Rs 25 as a target or you can take 100% i.e. Rs 50 as a target. So you can add up accordingly.

But here the advantage is the stop losses. The stop losses are very narrow and the risk/reward plays a key role.

The second pattern which I trade is the triple top and triple bottom. So basically triple top is the bullish structure where the previous two highs are similar and the third high is taken out above the previous two highs, forming the triple levels.

So again, in a triple top and triple bottom patterns which are in a traditional structure, this is slightly opposite to it but here two highs are taken out for a third time, which is known as a triple top and similarly, when the two bottoms are taken out, it's known as a triple bottom.

Look at the example over here. This Is the Religare chart. If you look at this structure, after a rally it consolidated, broke out of a triple top and rallied higher.

So I guess it broke out at around somewhere around 140. We made around 148-149 as a high and still it's trending bullish. So I would not say that the trend has changed and on this stock but yes, the triple top is playing very well on this chart.

Well, you might be surprised that there are any number of stocks. How to find on them on a daily basis. So there is a scanner and I use this software called TradePoint. There is an option for a scanner of each and every pattern of Point and Figure.

So I generally scan these two patterns on a daily basis. For Super Pattern, I'm using 0.5% by 3 on the reversal size box size and similarly on triple top and triple bottom as well. So I get a number of stocks.

Now it's very much important that every day you will get, when markets is trending bullish or bearish, a number of trends. A number of stocks will be thrown in front of you. I would suggest have a stock selection basket of the kind of the kind of stocks you want to trade. Create those baskets in the software. Run the setups only on those stocks.

So you have very much handy day in day out about those stocks, and I generally follow those kind of structures. So you can use this kind of scanner on a daily basis. Scan those stocks. Ss soon as the pattern breaks out or breaks down, you can trade.

Again, the advantage over here, this scanner is, it throws out stop losses as well which is the negative level of the pattern and you know that the start of the day, if the stop loss favourable. Is this stop loss under your control? Hence if it's under your control, you can implement the trade the following day.

But I do it at the end of the day so that I am handy with my trades whether to implement on the next day or not.

So that's the way I look for momentum stock selection. Again, I would request you to create your own basket. Taking a number of stocks doesn't help sometimes but when you are trading in and out with the stocks, it really helps.

So before I sign off, if you like our video, click on the subscribe button and click on the bell notification so that as soon as I post the videos, you will be notified and you can watch the various strategies which I discuss and do comment on how you like our videos. Signing off, Brijesh Bhatia. Thank you.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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