Chapter 6-4 Momentum

There is a natural flow of orders which effects the price action of a stock.  This flow is known as momentum.  Comprehending and utilizing momentum provides a trader a significant advantage when trading, especially intra-day.  This is because, when successfully in tune with the flow of orders in a stock one can almost predict to the cent what will occur next.  Accurately recognizing how strong or weak the momentum is will provide vital information on how far a stock will likely continue in a particular direction before reversing.  This kind of insight is not only crucial in determining a great entry point, but also in noticing when it is time to exit.

Below are two diagrams illustrating this natural flow of orders.  In both cases (an aggressive sell-off and a strong up move) you will find understanding the phases of momentum allow one to make an educated decision on profitable entry and exit points.

 

Diagram 1

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Order flow during each phase of a stock’s movement during a sudden fall in price:

 

  1. Larger offers come in and begin stepping down in price, with the majority of prints occurring on the bid.
  2. Spread widens with a continuous stream of prints on the bid as size dissipates.
  3. Spread tightens with prints dramatically slowing down as bids hold creating temporary support.
  4. Quick prints on the tape, often large, significantly taking offers as shorts cover their positions.
  5. Larger bids come in and begin stepping up in price with the majority of prints taking place on the offer.
  6. Spread widens with a continuous stream of prints on the offer as size dissipates.
  7. Spread tightens with prints dramatically slowing down as offers hold creating temporary resistance.
  8. Quick prints on the tape, often large, significantly clearing bids as longs exit their positions.

 

Diagram 2

 equities-content-image-6-4-2

 

Order flow during each phase of a stock’s movement during a sudden rise in price:

 

    1. Larger bids come in and begin stepping up in price, with the majority of prints taking place on the offer.
    2. Spread widens with a continuous stream of prints on the offer as size dissipates.
    3. Spread tightens with prints dramatically slowing down as offers hold creating temporary resistance.
    4. Quick prints on the tape, often large, significantly hitting bids as longs exit their positions.
    5. Larger offers come in and begin stepping down in price with the majority of prints occurring on the bid.
    6. Spread widens with a continuous stream of prints on the bid as size dissipates.
    7. Spread tightens with prints dramatically slowing down as bids hold creating temporary support.
    8. Quick prints on the tape, often large, significantly taking offers as shorts cover their positions

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Questions