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#4) How to Scan for: Momentum Breakouts



In order to trade Momentum Breakouts, one must first find Momentum Breakouts. To do this, a stock screener is used. Criteria must be chosen to find potential setups.


Screener Framework (Static):

  • Total Dollar Volume (Volume * Prize): ≥ {Account Size * 50 or 100}

  • Price: ≥$1

  • Average Daily Range (ADR%): >5%

These three criteria are static. This means that these 3 should be applied to any Momentum Breakout scanner you use. Most if not all the scanning platforms (ie. FinViz, TradingView, TC2000, TWS) will have the exact criteria or something very similar to choose from.


Screening for volume can be tricky. Using a daily volume or average volume could be used, however, you may be missing stocks that you would otherwise see. I believe the Total Dollar Volume (TDV) uses the best logic to capture volume criteria. TDV will be based on the account size one has. For example, if you have an account size of ~$5,000 USD, your scan should be greater than ≥$250,000 ($5,000 * 50) or ≥$500,000 ($5,000 * 100). The lower the value of TDV, the more stocks you will screen for. This rule ensures that you will be entering stocks with liquidity relative to your capital.


The Average Daily Range (ADR) is a measure of how much a stock typically moves within a trading day. I use a 20-day average ADR% that's greater than or equal to 5%. Because we are looking for fast movers going below 5% is not worth the time. The only expectation to this is if your account size is too large for these types of stocks, as normally a stock with a higher ADR might not have the level of TDV that is required to enter. ADR% may not be a criterion you can choose from in some screeners, instead, they may have a Price ADR or ATR criteria where it screens for the price movement instead of the percentage move, this is not helpful. Instead, a "Volatility %" metric can be used. TradingView has a "Volatility Weekly" and monthly metric that is calculated similarly to a 5-day ADR% Average. You may have to play around with it depending on the parameters of what it is screening for, but this can be used as a proxy.


A stock price greater than or equal to $1 is the minimum that should be used. Anything below this is not worth pursuing due to unpredictability and lack of eyeballs on it.


Screener Framework (Interchangeable):

  • 1 Month Performance: ≥20%

  • 3 Month Performance: ≥40%

  • 6 Month Performance: ≥60%

The criteria above are interchangeable. Meaning that each bullet point can be used within a separate screener. Therefore you can have a screener for each of the timeframes (ie. a 1-month performance scanner, a 3-month performance scanner, and a 6-month performance scanner). Using a combination of the above criteria will start to unveil what most momentum or trend-following traders see. Additionally, the percentages are not fixed, I normally adjust depending on the number of results.


Screener Framework (Custom Code):

  • Relative Strength

    • 2*(Price / Price 63 Days Ago) + (Price / Price 126 Days Ago) + (Price / Price 189 Days Ago) + (Price / Price 252 Days Ago)

*Created by Stockbee, Pradeep Bonde



  • Trend Intensity

    • Average Price of Past 7 Days/Average Price of Past 65 Days >=1.05

*Created by Stockbee, Pradeep Bonde



I want to include one additional section on "Custom Coded" criteria. Most scanning platforms will not have the option to code particular criteria, however, I thought I would include it even if you don't use those specific platforms, so you can get a sense of what other momentum-based traders are looking at. I know that TC2000 and Think or Swim are platforms that have this capability and that is why many traders them. Here are only a few interesting criteria that traders have used to identify momentum.


Relative Strength can be explained as summing the 63-day price percent change (previous quarter), 126-day price percent change (previous half year), 189-day price percent change (previous 3 quarters), 252-day price percent change (previous year) but giving 2x the weighting for the most recent quarter. You would then sort from highest to lowest value and then review the results. The notion is that scanning for stocks with the most recent price increases within the quarter compared to its previous quarters will uncover greater momentum leaders.


Stockbee's Trend Intensity is simply calculated as the ratio between the 7-day Simple Moving Average of a stock and the 65-day Simple Moving Average. It will show stocks with higher 7d SMA's relative to their 65d SMA. He uses this criterion to scan for the direction and strength of a trend.

 

An example in TradingView of a Momentum Breakout scanner could look something like this:

Something to note about scanning for stocks - you should have in the range of 25 - 75 stock when you scan. If there are more than 100 stocks that are showing up, you must tighten up the criteria. This can be done in a few ways. You can change "TDV" threshold from 50x of account size to 100x or increase the price threshold. By doing so you are tightening the criteria ranges and excluding more stocks so that you can reasonably asses the most appropriate setups.


To further elaborate on this, the picture above scanned 120 matches using the criteria. One may ask, I have changed the price threshold and the TDV to try to narrow down the search but I still have managed to find too many stocks that fit the scan, now what? This is where a level of creativity comes into play. For example, using a bit of logic we can assume that momentum occurs when the 10SMA is above the 20SMA. This can then be implemented into the scan. Note, by narrowing the search we might be missing out on opportunities. There is a balance that needs to happen between finding the right stocks and weeding out the stocks that wouldn't fit the setup.

 

Just like anything, finding breakout setups will take time and experience. But hopefully, this gives a good explanation of the working parts within a scan so that a person can fully understand each aspect of the scan and why each criterion is there. Now for lazy people including myself, I included "EOD Stock Scans" which is a tool I use that replicates popular traders' scans.


Bonus

For anyone using the TradingView screener, I have always been curious about the "Momentum (10)" criteria. I may be blind, but I have never been able to find a detailed explanation of what this criteria is or how it's calculated. After a speedy response from TradingView's support team, James explains. I have tested it out with a few screener layouts and it seems promising. I will keep testing to see if it catches any big players in the coming months.



Useful Scanners

  • Qullamaggie Discord

    • Under the "Wachlists-Only" channel, there are a lot of helpful people who post what they are looking at. Obviously, do not blindly follow. I sift through to see if I can see what they are seeing first, but it's a useful outlet to use. Other communities will have similar discussions. But NEVER, NEVER, NEVER pay for this type of service.

  • FinViz

    • Free scanner - has a mini chart preview to quickly view setups

  • TradingView

    • Free scanner - I use this platform as a charting software so the integration is convenient


 

References:


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