Momentum can make a stock move extremely rapidly in a very short space of time and this can create an outstanding lucrative profit opportunity for you.
You can over time learn to recognize some of the typical chart patterns that stocks can form, when they are behaving with a lot of volatility. Sometimes these stocks will move extremely well for no particular reason at all, but at other times it is either a news headline or a rumour that will cause these stocks to move very rapidly.
When a stock moves on a news announcement the trade is very similar to a momentum trade that occurs for no apparent reason but there are some distinct differences that you need to be aware of.
Firstly, the timing is different on a news trade because the momentum occurs so much more quickly than usual. Secondly, news creates opportunities with other stocks in the same sector that you may not have otherwise had. news announcement
We will now begin with the timing of a news trade.
When a share price moves because of a good or a bad news announcement, you will immediately see an increase of volume as traders react and buy the stock to capitalize on something positive or will sell to take their profits.
You usually will see a fair bit of movement on the first day of the trade but as more and more people hear of the news there can be protracted buying or selling pressure for the next day or so.
Most reactions to news will last anywhere from one to three days and most of the movement will take place on the very first day. Because of this you need to be very alert in placing your stop losses.But do not make them too tight,or you could be stopped out with little or no profit.
When you enter based on just news, only take the trade if the technical indicators support the entry. News trades can sometimes last up to three days and occasionally wil dribble out after just one day of trading.
One of the great advantages of news trades like this is that we are also able to take a look at other stocks in the same sector that may also be benefiting from the very same news. This is commonly called a sector trade and this can be a very easy way to trade stocks in the same sector that may not have experienced a run quite as quickly as your first stock choice.
When you do see a news headline, always check out the stock with the news first, and then you can do some research on the off chance you might find yourself another sector trade.What you are on the lookout for is a stock that is moving in the same direction as the stock with the news announcement.
The most profitable trade is usually made on the stock with the news but sometimes you hear the news too late after the run has faded out. If that happens, you can still go looking for the sector trade and find the other stocks within the same sector that are also benefiting from the same piece of news.
Momentum trades are occurring all the time in the stock market. Whether it is from news or just a sudden increase in buying or selling pressure, the secret to trading these strategies can be found in the technical indicators .So learn to watch for these basic price patterns that occur.
Chris Strudwick is a successful share trader on the Australian Stock Market Visit his weblogs at both http://www.asxnewbie.com AND http://www.aussie-retiree.com/ for more free articles and useful information about the stock market.