6 Best Momentum Scanner Tools and Indicators
Momentum trading is kind of like betting on streaks. If the New York Yankees have won eight games in a row, then many gamblers will bet on them to keep on winning because, as some sports analyst is bound to remark, “They’ve got momentum.”
In the stock market, momentum trading looks to profit from investing in “hot” stocks – expecting them to stay hot – and dumping “cold” stocks, expecting them to stay cold. Many momentum traders use momentum scanners to help them identify trades with the best potential for making a profit.
This article explains what momentum trading is and how momentum traders utilize stock scanners to implement trading strategies. We’ll also provide information on some of the best momentum scanners available, along with examining the relative advantages and disadvantages of momentum trading.
What is Momentum Trading?
Momentum trading is designed to capitalize on trading opportunities presented by stocks that are strongly trending. The theory behind momentum trading is simply the idea that a stock evidencing a strong trend – whether a strong uptrend or downtrend – is likely to sustain the trend long enough for short-term traders to get in and out of a trade profitably.
Momentum traders are typically short-term traders – either day traders looking for intraday profits or short to medium term swing traders.
Momentum trading is primarily a technical trading strategy. Traders looking for promising momentum trades often aren’t very concerned with the true market value of a stock. Instead, they are focused on the stock’s recent and current price action – more specifically, on gauging whether its price action is indicative of a strong trend.
Finding Momentum Stocks by Using a Stock Scanner
If you’re looking to find high momentum stocks, there are basically two ways you can go about it:
- A) You can bring up a chart – one by one – of each of the more than 3,000 stocks that are traded on the New York and NASDAQ stock exchanges combined and evaluate them in terms of trend direction and trend strength (i.e., momentum) or
- B) You can use a stock scanner that will identify all the stocks that meet your specified criteria for defining “stocks with strong momentum” in just a matter of seconds.
Yes, “B” is a lot easier and less time consuming.
A stock scanner – also known as a stock screener – is a software tool that enables traders to identify stocks that meet a trader’s specified criteria quickly.
A stock scan can be simple, such as a scan for stocks making a new 52-week high, or complex like a scan for stocks meeting multiple criteria, such as:
- Having a specified minimum amount of trading volume
- An ADX reading of 28 (or higher)
- Stocks that are up 5% or more on the day
- A net profit margin greater than 20%
- A debt-to-equity ratio less than 0.3
Some stock scanners offer to simplify scanning for high momentum stocks with their own proprietary momentum indicator that combines several price action factors. Most of these indicators allow you to add your own custom screening criteria if you wish.
Best Momentum Scanner Tools
There are various volatility based indicators available in most stock trading tools and brokerage platforms. We will talk about them in detail later. However, those indicators have limited capabilities.
Day trading stock screeners allow you to find momentum stocks much faster and with more cleverness. Here are two examples of the best momentum scanner tools:
1. Trade Ideas
Trade Ideas is the unbeaten number 1 stock scanner for day traders. I have seen the best educators and trading coaches utilizing Trade Ideas to increase profitability.
Below you find an example of a Momo-scanner that helps you hunt for momentum. Trade Ideas is structured in a simple way. First, you configure your scanner by defining values for your preferred filters and alerts. Then Trade Ideas scans the stock market and displays the results.
You can use a few hundred filters, alerts and many different columns to configure the screener in the way you want.
The example below filters for explosive volume, which typically causes high momentum:
Trade Ideas also comes with charting, backtesting, automated trading and more.
The detailed review of Trade Ideas provides further insights on how to use the tool efficiently.
2. Benzinga Pro
Benzinga Pro is another excellent tool that combines stock screening capabilities with news feeds, charting and SEC filings.
Below you see how the screener is structured. First, you enter the values into the fields, and then Benzinga Pro scans the market with the frequency you defined.
Benzinga does not have that many filters and alert types like Trade Ideas but is still a powerful tool that is worth trying.
Benzinga also comes with community access, an audio squawk and a calendar feature.
Best Technical Momentum Indicators
Momentum traders apply one or more technical analysis tools in order to gauge a stock’s momentum. Among the momentum indicators most frequently used in a stock scanner are the following:
1. The Average Directional Index (ADX)
The ADX is a technical indicator that the renowned technical analyst Welles Wilder created. Wilder designed the ADX to, first of all, indicate whether a stock is trending at all – or merely ranging back and forth within a limited trading range. Thus, one of the main advantages offered by the ADX is that it can help investors avoid burning up their investment capital by being drawn into trying to trade a trendless market.
A market is considered trendless until the ADX reading is 25 or higher. The higher the ADX reading, the stronger the trend. (ADX values range from 0 to 100. However, it’s rare to see an ADX number higher than 60 sustained for any length of time.)
A common, basic momentum scan input is ADX equal to or greater than 25.
2. The Moving Average Convergence-Divergence Indicator (MACD)
Many traders consider the MACD indicator to be one of the most reliable momentum indicators. Especially at times when its movement diverges from the movement of price (moves in the opposite direction). MACD divergence is a signal of waning momentum and, therefore, of a possible impending trend change.
The MACD appears on a price chart as a histogram. Positive histogram values indicate a bullish trend (and, just as with the ADX, higher numbers indicate a stronger trend); negative (below zero) values indicate a bearish trend.
Traders can search for stocks with bullish momentum by specifying that a scanner looks for stocks with a MACD histogram value greater than zero or where the MACD line is above the signal line. Conversely, bearish momentum is reflected by the MACD line crossing to below the signal line and/or by a negative histogram number (below zero).
3. Moving Averages (MA)
It’s simple to use short-term and long-term moving averages to spot trending stocks. You can specify that your stock scanner screen for stocks where, for example, a 10-period moving average is above the 50-period moving average. Of course, to screen for downtrending stocks, you specify the shorter period moving average as below the longer-term MA.
You can also screen for stocks where the stock price is a certain percentage greater than a major moving average (e.g., price 10%, or more, higher than the 50-period moving average).
4. Trading Volume
High or increasing volume is commonly interpreted as a sign that the existing trend has strong momentum. A volume scan requirement might be something like, “Current trading volume greater than 10-day average trading volume”.
Advantages and Disadvantages of Momentum Trading
One of the advantages of momentum trading is that it focuses your investing efforts on stocks showing significant price movement. You may or may not end up with a profitable trade, but you can at least be pretty well assured that you won’t have your investment capital tied up in a stock that’s going nowhere.
Trading based on trend strength, rather than just on trend direction, increases your chances of being able to maximize potential trend trading profits. Momentum scanners can help you get into a new trend near the beginning and also warn you to take profits and get out before a market reversal occurs.
We noted above that momentum trading is primarily technical in nature (although stock scanners do allow you to input fundamental data requirements, such as minimum profit margin or earnings per share growth).
Relying on technical analysis leaves you exposed to having your trade undone by “real world” events. A stock can have all the positive momentum in the world but drop like a rock in reaction to a bad economic report.
Another disadvantage of momentum trading is that it usually requires that you be able to monitor market action throughout the trading day. Especially when utilized for day trading, it requires continual monitoring of both your trades and your stock screening criteria, as a stock can transition from strong uptrend momentum to strong downtrend momentum in a relatively short span of time.
Automated trading can be helpful to execute trades with higher accuracy and frequency.
See Also: VWAP scanner
What is a high of day momentum scanner?
The high of day momentum scanner identifies stocks trading at the high of the day with high relative volume.
What is a low float momentum scanner?
A low float momentum scanner identifies stocks with low float and combines this filtered universe of stock with unfolding momentum. The low float of stock often leads to high volatility.