How do you scan for momentum stocks with high liquidity and low slippage?

Momentum trading is a strategy that involves buying and selling stocks that are moving in a strong direction, either up or down, and riding the wave of price action. It can be very profitable, but also very risky, especially when the market is volatile and unpredictable. To reduce the risk of losing money due to sudden price changes or lack of liquidity, you need to scan for momentum stocks that have high liquidity and low slippage. Liquidity refers to how easily you can buy and sell a stock without affecting its price, and slippage refers to the difference between the price you expect to pay or receive and the actual price you get. In this article, you will learn how to scan for momentum stocks with high liquidity and low slippage using some technical analysis tools and criteria.

1 Define your time frame

The first step to scan for momentum stocks is to define your time frame, or how long you plan to hold the stock. This will affect the type of indicators and filters you use to identify the best candidates. For example, if you are a day trader, you might want to use intraday charts, such as 15-minute or 30-minute, and look for stocks that have strong momentum and volume in the current session. If you are a swing trader, you might want to use daily or weekly charts, and look for stocks that have been trending for several days or weeks, and have consistent volume and volatility.

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CA Timsi Rajpal

Chartered Accountant|KNAV|Ex- PwC|Ex-KPMG
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Apart from short term, you must consider long term perspective as well. The momentum may be good in short term along with substantial volumes, but it's important to consider whether there is any long term resistance. A long term resistance can put pause to short term momentum. Hence, this is one of the important factors to consider while identifying momentum stocks.

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2 Use technical indicators

The next step in stock analysis is to measure the momentum, trend, and strength of the stocks with technical indicators. Moving averages are lines that smooth out the price data and indicate the direction and speed of the trend. Different periods of moving averages, such as 10-day, 50-day, or 200-day, can be used to identify stocks that are trading above or below them. The relative strength index (RSI) is an oscillator that ranges from 0 to 100 and shows how overbought or oversold a stock is. A common rule is to look for stocks that have an RSI above 70 (overbought) or below 30 (oversold). The MACD is another oscillator that shows the difference between two moving averages, and a signal line that is a moving average of the difference. It can be used to find stocks that have momentum and are showing positive or negative divergence with the price.

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Art Fonseca

Independent Financial Services Professional
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50 day MA relative to 200 day MA for a basic snapshot of the current trend is one basic starting consideration. Stochastics with two time frames are critical in assessing shorter term trends, as well as some longer term trends. The time frames will vary with the desired time frame one is planning to buy or sell the stock. MACD, as you pointed out, takes two different time periods in assessing the expected movement of the stock, similar to overbought or oversold. The time frames set will be in conjunction with the holding period one expects for any given trade. RSI is useful for a broader indicator of trend analysis. Envelopes are also helpful in determining potential tops and bottoms for various time parameters.

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3 Apply filters

The final step is to apply filters to narrow down your list of potential momentum stocks. Filters are criteria that help you eliminate stocks that are not suitable for your strategy, such as low liquidity, high slippage, or poor fundamentals. Volume is a key factor to consider, as it indicates the liquidity and demand of the stock. Look for stocks with high volume, preferably above their average volume, and that are increasing with the price movement. Additionally, pay attention to the bid-ask spread, which is the difference between the highest price someone is willing to pay for a stock and the lowest price someone is willing to sell it for. A narrow spread indicates minimal slippage and cost of trading. Lastly, consider fundamental factors such as earnings, revenue, growth, debt, valuation etc. that indicate the quality and sustainability of the stock's performance. Look for stocks with strong fundamentals above their industry or market averages that are improving or exceeding expectations.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you scan for momentum stocks with high liquidity and low slippage?

1

2

3

4

1 Define your time frame

2 Use technical indicators

3 Apply filters

4 Here’s what else to consider

Technical Analysis

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How do you scan for momentum stocks with high liquidity and low slippage?

1

2

3

4

1 Define your time frame

2 Use technical indicators

3 Apply filters

4 Here’s what else to consider

Technical Analysis

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