High momentum trading some professional traders have

High-Momentum Trading
Some professional traders have made a business of trading in the direction of the price
move only when momentum exceeds the high threshold level rather than anticipating a
change of direction. There is a small window of opportunity when prices are moving
fast. They will usually continue at the same, or greater, momentum for a short time,
measured usually in minutes or hours, but occasionally a few days. There is a lot of
money to be made in a short time—but at great risk if prices reverse direction sooner
than expected.
Price patterns have changed. There are many more day traders. When one stock breaks
out above a previous high, everyone sees it as an opportunity for profit. Buy orders Page 179 of 841.

start to flow, and volume increases. Stocks that are normally ignored can attract large
volume when prices make a new high. Traders ride the rising prices for as long as
possible, watching to see when volume begins to drop, then they exit. Some may just
target a modest profit and get out when that target is reached.
High-momentum trading is a fast game that requires tools that allow you to scan a
wide range of stocks. You are looking for one that has made a new high after a long,
quiet period. You may also continually sort stocks by the highest momentum values.
You need to stay glued to your screen, enter fast and exit fast. It is a full-time
commitment.
Moving Average Convergence/Divergence (MACD)
Many of the practical problems of fading prices using momentum are solved with the
Moving Average Convergence/Divergence (MACD),
2
developed by Gerald Appel. The
MACD uses momentum calculated as the difference between two trendlines, produced
using exponential smoothing. This momentum value is further smoothed to give a
signal line . The most common form of MACD uses the difference between a 12-day and
26-day exponential smoothing. The signal line, used to produce trading
recommendations, is a 9-day smoothing of the MACD. The MACD can be created as
follows:
Step 1: Choose the two calculation periods for the trend, for example, 20 and 40.
Convert to smoothing constants using 2/( n + 1).
Step 2: Calculate the slow trendline, E 40, using the smoothing value 0.0243.
Step 3: Calculate the fast trendline, E 20, using the smoothing value 0.0476.
Step 4: The MACD line, the faster-responding line in the bottom panel of Figure
6.9 , is E 20 − E 40. When the market is moving up quickly, the fast smoothing will
be above the slow, and the difference will be positive. This is done so that the
MACD line goes up when prices go up.
FIGURE 6.9 MACD for AOL. The MACD line is the faster of the two
trendlines in the bottom panel; the signal line is the slower. The
histogram is created by subtracting the slower signal line from the
MACD line.
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Step 5: The signal line is the 9-day smoothing (using a constant of 0.10) of the
MACD line. The signal line is slower than the MACD; therefore, it can be seen in
the bottom panel of Figure 6.9 as the lower line when prices are moving higher.