Rules & Method of Momentum Stock Investing

Why do people still aggressively buy stocks even when prices are overvalued? The reason is simple, the market is full of greedy investors who believe that the prices will go even higher and thus end up buying more, pushing the prices to be even higher. This is the magic of demand and supply. Momentum stocks are very popular among fund managers, investors and the general public. It is usually due to sector rotations that the stocks in these hot industries become popular and overvalued and yet you can still make money out of this.

Momentum Stock Selection: Using The Momentum Method For Maximum Profits by Jake Bernstein Describes in detail a method of market analysis and timing that can be tracked manually or with a minimal amount of computer power, a method by which investors and traders alike may determine when a stock or futures market is likely to change direction, when to buy, when to sell, how to manage risk, and how to maximize reward.

As you know the big players of these momentum stocks are the fund managers. Therefore, when the sector rotate or a hotter stock emerges, these fund managers move their funds from one to the other, causing the prior stock to dive in price.

In order to earn money from momentum stocks, it is very important to buy and sell at the right time or you could easily burn your fingers.

There are 7 golden rules of investing in momentum stocks.

• Finding out which industry or sector is in rotation
• Positive and increasing growth in earnings of 15% over last 3 years
• Positive and increasing growth in earnings must be more than stock market index and the industry growth over last 3 years
• There must be significantly a lot more buyers than sellers for the stock. You can check this under Ownership Activity at msncentral.com
• Return on Equity of over 15% for last 3 years and increasing sales growth
• Overall market must be in a bullish mindset
• Do not buy a stock when the market is undergoing consolidation. Instead, the best buying point is when the stock prices breaks out of the resistance line and out of the consolidation pattern in high volume. Take note that during a consolidation pattern, the stock prices could dip even lower too. Therefore, it is important that you must take into consideration the above 6 points when investing in momentum stocks too.