Momentum investing is one of the most powerful strategies in the market. The basic premise is simple: stocks that have been going up tend to keep going up, and stocks that have been going down tend to keep going down. But finding momentum stocks before they peak requires systematic screening. Here is how to build an effective momentum stock screener.
What Makes a Momentum Stock?
Momentum stocks exhibit strong price appreciation combined with increasing volume and positive sentiment. They are not just stocks that went up once; they show consistent strength over multiple time periods. The best momentum stocks demonstrate relative strength, meaning they outperform the broader market even during pullbacks.
Key insight: True momentum is about consistency, not just recent gains. A stock up 50% in one day is not momentum; a stock up 5% per week for 10 weeks is momentum.
Essential Momentum Screening Criteria
Price Performance Filters
The foundation of any momentum screen is price performance across multiple timeframes:
- 52-week high proximity: Within 10% of 52-week high
- 3-month return: Greater than 20%
- 1-month return: Greater than 5%
- 1-week return: Positive (not declining)
The key is alignment across timeframes. You want stocks that are strong on all fronts, not just one period.
Relative Strength Filters
Relative strength compares a stock's performance to a benchmark like the S&P 500:
- RS rating above 80: Stock outperforms 80% of all stocks
- Industry RS positive: Stock outperforms its sector
- Outperforming SPY: 3-month return exceeds index return
Momentum Screen Example
Price within 5% of 52-week high
3-month return > 25%
1-month return > 8%
RS rating > 85
Average volume > 500,000 shares
This screen typically returns 20-50 stocks depending on market conditions.
Volume Confirmation
Momentum without volume is suspect. Include these volume filters:
- Above average volume: Current volume > 50-day average
- Rising volume trend: 20-day average volume > 50-day average
- Minimum liquidity: Average volume > 200,000 shares
Volume confirms that institutions are participating in the move. Without institutional buying, momentum fades quickly.
Technical Indicator Filters
Moving Average Position
Price relative to moving averages indicates trend strength:
- Above 20-day SMA: Short-term uptrend intact
- Above 50-day SMA: Medium-term uptrend intact
- 20-day above 50-day: Golden cross formation
RSI Sweet Spot
Contrary to popular belief, momentum traders want elevated RSI:
- RSI between 50-70: Strong but not overheated
- RSI above 40: Confirms bullish momentum
- Avoid RSI below 50: Indicates weakening momentum
Advanced Momentum Criteria
Earnings Momentum
Fundamental momentum often precedes price momentum:
- Positive earnings surprises: Last 2 quarters beat estimates
- Rising estimates: Analyst estimates revised upward
- Revenue growth: Quarterly revenue up year-over-year
Accumulation/Distribution
Track whether smart money is accumulating:
- Accumulation rating A or B: More buying than selling
- Up days on higher volume: Bullish accumulation pattern
- Institutional ownership increasing: Fund managers adding positions
Building Your Momentum Watchlist
A good momentum strategy requires layered screening:
- Primary screen: Run broad criteria weekly to identify candidates
- Refinement: Apply stricter criteria for actual trades
- Entry timing: Wait for pullbacks to moving averages for entry
- Position sizing: Allocate more to highest RS stocks
Common Momentum Screening Mistakes
- Chasing extended stocks: Stocks too far above moving averages often pull back
- Ignoring volume: Low volume rallies fail more often
- Single timeframe focus: Check multiple periods for consistency
- No exit criteria: Define when momentum fails before entering
- Overtrading: Quality over quantity in momentum names
When Momentum Fails
Know the warning signs that momentum is fading:
- New high on declining volume
- Price closes in lower half of daily range
- Break below 20-day moving average
- RS line making lower highs while price makes higher highs
Exit rule: When a momentum stock closes below its 50-day moving average on above-average volume, momentum has likely ended. Protect profits and move to the next opportunity.
Sample Momentum Screen Setup
Here is a complete screen you can replicate:
- Market cap > $1 billion
- Average volume > 500,000
- Price > $10
- Price within 10% of 52-week high
- 3-month price change > 20%
- Price > 20-day SMA > 50-day SMA
- RSI(14) between 50 and 75
- Current volume > 100% of 50-day average
Track Your Momentum Trades
Pro Trader Dashboard helps you analyze your momentum strategy performance. See which setups work best and optimize your screening criteria.
Summary
Momentum screening combines price performance, relative strength, volume confirmation, and technical indicators to identify stocks in strong uptrends. Focus on stocks showing consistent strength across multiple timeframes, confirmed by rising volume and institutional accumulation. Remember that momentum investing requires discipline: buy the strongest names, exit when momentum fades, and always have your next candidates ready.
Learn more: RSI indicator guide and moving averages explained.