Momentum Trading

A Momentum Trade occurs when you follow the trend of the stock that is stronger than normal. For example, after
you gain some trading experience you will get a feel for a strong upmove. You will have a feel for what a stock should
look like when the stock trades higher: how much it will go up, and how quickly it will trade higher. With a Momentum
Trade the stock is trading stronger than normal. The buyer(s) is overly aggressive. You may get the sense that the
buyer could purchase the stock cheaper if he would just drop his bid. But since there still is a buyer, and she is buying
aggressively you follow this buyer and get long. You follow this aggressive buyer(s).

There is more downside risk with a Momentum Trade. If the buyer(s) drops the stock may trade lower quickly.
Generally 1-7c of potential downside is our risk. With a Momentum Trade the downside can be 25-30c. But the
reason why we buy is because the upside can also be much greater. If 15-25c is our normal gain, then with a
Momentum trade our upside can be 50c or 75c or higher. So our risk/reward is favorable.

When you see a stock that is stronger than you had expected then follow the trend. Maybe there is a huge buyer with
millions more to buy. We are not experts in how multi-million share orders should be filled. Sometimes, it can be hard
to believe just how much someone has to buy. Every so often Steve will question, “He still has more to buy?” Or
GMan will scold, “This guy has no idea how to fill his big order!” Why not stay long until you see the selling stop?
There is a buyer(s) and they want the stock and now. Get on the train until the momentum slows.

Trading a momentum stock is sorta like dating that girl who you know can do better than you. You know that one day
she is gonna wake up and realize that she can do better than you. But you enjoy her company. And you are just
hoping that it will take her a very long time to figure this out. Hey maybe she never will. Chop for you! A momentum
stock tends to be trading higher than you expected. It will most likely eventually trade lower. Stocks tend to revert to
the mean. But it isn't now. And there is a ton to be made following the trend. So stay long.

Momentum trading is different from a following the trend play in that you must be more aggressive. These plays are
faster and more explosive. Trending plays tend to be slow and methodical. There will be some trades where you must
make a fast decision about paying the offer, perhaps even when you are not really sure whether the stock is going
up. But you do pay that offer because you don't want to miss the potential explosive upmove. That upmove is
potentially so rewarding that it is worth it to pay the offer.

Some characteristics about Momentum Stocks:

1) Pay the Offer

It is harder to get hit on the bid so you most likely will have to pay the offer. And you may have to pay the offer 10c to
15c higher than you normally do. This is acceptable since your upside is also much greater than normal.

2) Falls like a Deck of Cards

When the buyer(s) stops this stock may fall like a deck of cards. The stock probably should not be up at these prices.
Many traders suspect this. But the longs are willing to bet that they can exit when the buying stops.

3) Big Daddy Money

There is a ton of money that can be made learning this technique. There are huge days potentially ahead for you
playing the momentum of a stock. The recent numbers on our desk shorting oil and financials have been outstanding.
This is the result of downside momentum trading. Chop SMB!

4) Back in the Day

I have seen MSCO buy YHOO for 50 straight points back in the day. I have seen AOL bought for 10 straight points
without a bid ever dropping. Those are some moves you want to be in. Chop!

5) Visual
a) Offers are cleared quickly and bids step up quickly.
b) The stock pauses after a sharp downmove, pulls back just a little, and then makes an explosive upmove higher
than the previous high.

6) Speed
You must be fast and mentally agile to trade this play. If the stock does not trade up quickly in your favor generally
you must dump the stock and start over.

7) It Helps if You are Actually in a Momentum

Stock
If you incorrectly conclude that you are in a Momentum Stock then you are gonna take some rips. There will be lots of
paying the offers and hitting the bids. Ripper!

8) Lower Win Rate

You will make big chops when get on the right side of a Momentum Trade but your win rate will be lower than other
SMB Plays.

9) Don't Wuss Out

When you get on the right side of a Momentum Trade you must be able to hold the stock for the significant upmove.
You cannot sell too early or else the risk/reward ratio does not compute. But contemporaneously you must balance
this against the risk that the stock can crumble at any moment.

10) Get Out Get Out Get Out !

When the stock starts to turn you must get out get out get out and not hope, wish, and pray that the momentum
continues.

11) Same Applies for Downside Momentum

Momentum trading on the upside and downside is just a mirror image of each other and both work as well. In this
weak market playing the downside momentum in stocks is very profitable. We will talk some more about momentum
trading with videos, other written lectures, and a classroom lecture. This is a trade you must learn. There is big
money to be made with a Momentum Trade.

12) Play Defense First

If you are not sure if you can exit a Momentum Trade if the stock quickly reverses then you should not be in the trade.
Who will you hit if the stock reverses? Are you confident that that bid is real? Play defense first.

Plays that Tend to have Momentum

Behind Them

Below is a list of trades that tend to have Momentum behind them. It is very important while making a Momentum
Trade that you are actually in a Momentum Stock. And there will be times where you will make a Momentum Trade
and there is no momentum behind the stock. That may be because the stock is not ready to move just yet or because
you are not actually in a Momentum Stock. So it is imperative that you are aware of the stocks that tend to have
momentum behind them. Enjoy our list below.

1) Fresh significant news in a stock or industry

We have seen many examples of this lately with FNM, FRE, BSC, LEH (chart and news summary below). There has
been news of huge write-downs, talk of going bankrupt, news of the government bailing out FNM, FRE, and news
that JPM would buy BSC. These news stories were fresh and significant. So in a stock like this if the stock is going up
you want to be long and if it’s trending down then you want to be short. The stock is going to move. And you want to
be on the right side of it.

Live In Play
10-Jul-08
10:55 LEH Lehman Brothers: Reuters reports LEH shares drop 11% on rumors of Pimco reducing business with co,
according to traders
(17.75 -1.99) -Update

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2) New Industry

AAPL and the Solar Stocks are examples of new industries that buyers bid up. Before AAPL and FSLR (description
and chart below) there was EBAY, PCLN, and GOOG. What these stocks all have in common is that their industry is
so new that it is hard to quantify how big the companies can become. They grow at staggering rates and their upside
is not quantifiable presently. Can an analyst predict this stock's upside? So these stocks tend to catch bids, and
higher bids, and higher bids. The charts are vertical.

First Solar, Inc. designs and manufactures solar modules using a thin film semiconductor technology. Its solar
modules employ a thin layer of cadmium telluride
semiconductor material to convert sunlight into electricity. It has long-term solar module supply contracts with 12
European project developers and system integrators. Its customers develops, owns and operates solar power plants
or sells turnkey solar power plants to end-users that include owners of land, owners of agricultural buildings, owners
of commercial warehouses, offices and industrial buildings, public agencies, municipal government authorities, utility
companies, and financial investors that desire to own large scale solar power plant projects.
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3) Huge changes in an industry

Oil has risen from 16 dollars a barrel to 130 as I write. So the energy stocks exploded. CHK, HK, VLO will all be in
play as oil rises and falls with such volatility. And your trade is to follow the momentum. If the XLE and CL#F are
heading higher, and the price action of the stock is heading higher, then you are long. If oil is coming off hard like it
has lately, and the energy stocks as well, then get short (OIL, USO, XLE, CHK, and HK charts below curtsey of
Shawn Mikol and Henry Chen).
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4) Gaps in the charts

When there is a ton of room between chart levels you will get some nice momentum in a stock. For example in our
charts below LVS broke its downtrend on heavy volume. The next resistance level is not until 57, 60. So the
momentum in this stock was up. You can see from our charts below the next AM that LVS traded strongly up to its 57
resistance level. By playing the long-side momentum from above 50.60 to 57 traders on our desk made chops.

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5) Stocks without Resistance Levels

When a stock sets a new 52 week high there is no technical resistance levels for the stock. It may just run until a
huge seller appears. These are plays where I want to get long. The same holds true for a stock that has no support in
sight. I want to get short and follow the momentum.
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6) Sector Rotation

Sometime big money comes out of tech and into energy for example. When you see this you want to follow the
money. Get long the stocks that are being bought up with the rotation in money.

7) Anything else that catches strong bids

Sometimes a stock is incredibly strong and you do not know why. Quickly check the news. If there is no news and
someone is buying and buying and buying, then get long. The price action, bidding, held bids, and cleared offers
have created a Momentum Trade.

The Top

When you are in a momentum stock it is important to recognize the top. There are some common patterns for a
Momentum Stock when it reaches its top. You don't want to get stuck with a momentum stock if it reverses. That’s a
rip. So let's talk about what may signal a top for a momentum stock.

1) The move is not as explosive

When you are trading a momentum stock it is important to gauge the upmoves. How much did the stock go up during
the previous upmove? How much did the stock go up the move before? Is this recent upmove as explosive as the
last? When a momentum stock nears its top the last upmove may not be as explosive as previous upmoves. Keep
this in mind.

2) Stock can’t trade above a certain price

Watch to see if the stock has trouble trading above certain prices. If a stock cannot trade above certain prices on
multiple occasions this may be the top.

3) The buying is not the same up here

The buyer should have a signature to his buying. He should buy a certain way. Generally the buying is aggressive.
You may recognize that the buyer will not pay at certain levels. This may signal his buy order does not extend to this
altitude. And thus the stock may be near the top.

4) Huge new seller appears

A huge new seller appears on the offer. This may be a signal that the stock is ready to reverse. Be careful here
though. Sometimes the huge seller is about to get rolled over. Make that distinction.

5) Buyer starts dropping

If the buyer has not dropped on the way up, and now starts dropping, then this should get your attention. Or maybe
the buyer drops a little more than previously, then this should also get your attention. If you recognize one of these
scenarios your stock may be near the top.

6) Stock drops then drops again

Generally a momentum stock may pullback, but after a pullback it trades explosively higher. If the stock drops, does
not trade higher, then drops again, then this may indicate that that stock is going to reverse. But be careful here.
Sometimes a Momentum Stock pulls back, and then pulls back again as a short trap. And then this Momentum Stock
ends up trading much higher. Just keep that in mind if the stock is not trading lower quickly when it drops that second
time. This is a possibility.

7) Something Different

It is impossible to highlight all of the different scenarios where your Momentum Stock will show you something
different. But just keep in mind that the signal for a reversal is generally identifiable. And it’s usually by noticing
something different.

IF/Then (Momentum)

CBA, SMU, MCL, and DLE helped put together some specific trading scenarios for you. These are some general
principles to follow for a Momentum Trade. Their If/Then Statements are not meant to be exhaustive but to get you
thinking and possess some principles to follow. Below is their work:

If the stock is in an uptrend and strong and the offers are cleared, then pay (before you pay know where and who you
will hit to exit if the stock trades against you- Play defense first!)

If the stock stops going up, then sell half (all if 100 shares)

If the stock is uberstrong, then you may have to aggressively pay the offer to enter If you are long, then always put
your offer up at crazy prices that would be great sales. She just might say, “Yes.”

If the stock starts going up again, then buy double

If the stock stops going up after you buy double, then sell half

If the stock drops below the last offer paid, then hit the stock

If the stock trades in your favor, then use quarter increments to lighten up

If large offers decrementing, then add one lot

If buying higher on the bid, then add one lot

If the stock starts to drop and previously had not dropped, then do not bid

If the move is too explosive (much more explosive than you have seen), then take some profits

If the stock starts to slow or turn, then wait for confirmation to get short

If the uptrend gets broken, then do not buy into pullbacks (focus on being short)

If bids decrement, then hit the bids

If the stock slows, then cover some on the bid

If the second down leg starts, then hit more

If you see selling on the offer lower, then hit more

If stock ticks up, then know where you are getting flat before you enter the trade

If big offers that came lower decrement, then get flat

If stock trades against you, then get flat

If stock is moving, then get the stock before it is over extended

One Good Trade- Momentum Trades

1. Alexander James – (ADI) – One Good Trade – 5-21-08

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Proper Preparation: Reports Q2 (Apr) earnings of $0.44 per share, excluding nonrecurring items, $0.03 better than
the First Call consensus of $0.41; revenues rose 5.8% year/year to $649.3 mln vs the $627.2 mln consensus. Co
issues guidance for Q3, sees EPS of $0.43-0.45 vs. $0.43 consensus; sees Q3 revs of $650-665 mln vs. $638.81
mln consensus. Board of Directors has declared a cash dividend up 11% q/q to $0.20. Levels: 33.50, 34.00, 34.50
Average Volume: 4.5mm
Short % of float: 3.2%
52 week range: 26.15 - 40.99

Hard work: Watched the Prints and Inside Market and noticed ADI could not trade above 33.00. A big offer for 20k
appeared on NYSE.

Patience: Wanted to get long close to 33 if 33 lifted. Got long at 33.03 as soon as 33.00 lifted.

Detailed plan: Plan was to get long as soon as 33.00 lifted and stay long as long as ADI was ticking up (Momentum
Trade). My exit plan for if ADI traded against me was to exit if I paid and ADI did not tick up immediately. My exit plan
for if ADI traded in my favor was to sell when ADI slowed, when the stock stopped ticking up.

Discipline: ADI started to slow near 33.14. The offers were not getting taken anymore. Sold at 33.14 as soon as the
stock slowed. Mini chop!

Sharing your best trading ideas: If Manny Ramirez can act like a diva then so can I (ok Bella inserted this part and
not me).

Review: I had a long bias initially because ADI had positive earnings and guidance and I thought ADI would pop after
some initial profit taking on the Open. Looking back at the trade I should have recognized that ADI could not trade
above 33.00 and shorted ADI when the large offer at 33.00 appeared. That said, the actual trade I made when 33.00
lifted was executed well as I sold as soon as the momentum slowed.