How to Scan Stocks for Momentum
Momentum is the tendency of stocks that have been going up to keep going up, at least for a while. A momentum scan is a set of filters that surfaces those leaders. The hard part isn't finding stocks that went up; it's finding the ones still worth buying.
The core momentum filters
- Relative strength. How the stock performed compared with the market over the same period. A stock up 12% while the S&P 500 is up 2% has strong relative strength. Comparing 1-month, 3-month and 6-month returns against an index like SPY is a simple version.
- Trend structure. Price above its 20-day and 50-day moving averages, with the 50-day above the 200-day. This keeps you in stocks where the momentum is a trend, not a one-day pop.
- Near highs. Leaders tend to trade within 10 to 15% of their 52-week high. Stocks far below their highs have supply overhead from people waiting to break even.
- Volume. Average daily volume high enough to trade easily, and ideally rising volume on up days.
A sample scan
| Filter | Setting |
|---|---|
| Average daily volume | Above 1 million shares |
| Price | Above $10 |
| Price vs. 50-day average | Above |
| 50-day vs. 200-day average | Above |
| 3-month performance vs. SPY | Better by 10 percentage points or more |
| Distance from 52-week high | Within 15% |
This returns a list of strong stocks. It doesn't return entries. That's the next step.
From momentum list to trade
Buying a stock just because it's strong usually means buying it extended, far above any support, where the nearest logical stop is a long way down. Momentum traders typically wait for one of two things:
- A rest. A flag or a pullback to a rising moving average, which gives a nearby stop.
- A breakout. A move out of a tight base, which gives a clear level for the stop.
Pitfalls
- Chasing gaps. A stock up 20% on earnings shows up on every momentum scan that morning. That's usually the worst time to buy.
- Ignoring regime. Momentum works best in trending markets and can reverse violently when the market turns. When leaders start breaking their 50-day averages together, that's a signal about the market, not just the stocks.
- Over-filtering. Stack too many conditions and the scan returns nothing, or only returns names you'd have found anyway.
How Zelos uses it
Relative strength is one of the five scored components in both Swing Trader and Breakout Rider. The scan finds strong stocks first, then waits for them to form a setup with a defined stop, instead of publishing whatever went up the most yesterday.
Practice it freeChart ReplayTrade momentum names bar by bar in Chart Replay on real historical charts, with the ticker hidden. →Frequently asked questions
What is a good relative strength number?
There is no universal threshold. A common approach is to rank stocks by their return versus an index over several periods and focus on the top 10 to 20%.
Does momentum investing work?
Momentum is one of the most studied effects in finance and has historically shown up across many markets, but it goes through sharp drawdowns, especially at market turning points. Past behavior is not a guarantee.
What timeframe should a momentum scan use?
Swing traders often combine 1-month, 3-month and 6-month performance. Shorter windows catch new leaders sooner but produce more noise.