Let’s face it, as momentum traders, we’re all more or less:
– Looking at the same charts
– Listening to the same news
– Trading the same stocks
However, some of us are wildly profitable, while others are struggling so much that they’re ready to quit.
The advantage that millionaire traders have isn’t that they have better news or charting tools…
…it’s because they have a better mindset and psychology for trading.
What does that mean?
Their approach to trading is completely different…
They’re typically selling into strength and buying into weakness.
You see, most Wall Street analysts don’t cover momentum stocks, especially small and micro-caps. Even some mutual funds still avoid adding stocks under $5 in their portfolios.
That means a lot of amateurs are trading momentum stocks. Many of them are just trying to catch the winning lottery ticket…
…they aren’t trading off patterns, nor do they understand the catalysts…(It’s how I teach my Freedom Trader clients how to trade)
Instead, they are:
And sometimes acting on pure FOMO…
…aka the herd mentality
The herd is so predictable and so often wrong…
…. That it’s worth learning their patterns and then profiting off the mistakes they make.
Now, a lot of amateurs trade momentum stocks one way… they see it run up a lot… and just chase, no rhyme or reason. They’ll see a stock move up 20%, and think they have to be in it because it’s going to go higher.
However, what they don’t know is the fact that momentum stocks don’t just go up forever… they’ll go up take a breather before they run higher.
For example, they’ll chase a stock like this…
Check out this daily chart in Eltek Ltd. (ELTK) above.
Amateur traders will miss the initial move… see a stock triple in a short period and don’t want to miss out on the next leg up…
… only to watch the stock go against them…
Heck, they might even double down as the stock moves against them… only to take a massive loss when they can’t take the pain any longer.
Well, it all has to do with the psychology behind the trade.
The Psychology Behind Momentum Stocks
I get it, trading is exciting… and when you see a stock moving up really fast… you want to get in.
However, you could imagine how many other traders have that same thought process…
… thinking they’re going to buy the stock and it’ll just keep going higher.
This is what we call the herd mentality.
Basically, traders are just “following” each other and don’t really have their own thoughts on a stock or trade. They just gravitate towards what’s moving and just buy the shares.
Not only that, with the herd mentality, they’re actually playing into their emotions, like FOMO and being impatient.
With momentum stocks, I don’t like to buy into the FOMO, and I actually like to be patient.
For example, I actually traded ELTK… but I didn’t chase it… I actually waited for the Horizon Line to show up.
If you look at the blue rectangular area… that’s where the Horizon Line showed up.
Now, I was watching this stock closely, and I actually let clients know it was on my radar before I got into the stock.
Once I saw a clear area of value… I bought shares.
(Want to learn how to trade momentum stocks the right way? Click here to watch my latest lesson on how to spot winners with just one simple line)
Now, just a day later… I ended up taking profits.
Although I didn’t catch the initial run-up… it doesn’t mean you should forget about the stock and move on because there could be another play in it.
On the initial move, there’s the herd mentality… and it’s something you want to avoid at all costs.
You see, what usually ends up happening is once a lot of the amateurs buy… there becomes an excess supply of the stock.
In other words, there isn’t a whole lot of demand anymore because all of those traders bought shares… and now they’re looking to sell. The professional momentum traders are the first ones out the doors… while the amateurs just buy and hold… and get stuck holding the bag.
Follow the Pattern, Not the Herd
This happens all the time…
For example, check out this daily chart in Workhorse Group (WKHS).
WKHS actually had a positive catalyst: The POTUS tweeted about the stock and noted that General Motors CEO informed him it would sell its manufacturing plan to Workhorse.
Now, that send the stock higher by over 300%.
Some amateurs will be impatient and have FOMO… follow the herd of buyers… not caring about what price they get into the stock at.
Well, those who actually chased this stock up were feeling the pain after.
Just check out what WKHS did a few weeks after that runup.
It pulled back more than 50% from its high!
If you look at the email from earlier, I actually traded this stock too and pulled out $15K from it.
Well, I waited for the Horizon Line… again.
Here’s where I spotted the Horizon Line (in the orange rectangular area)
You see, rather than just buying for no rhyme or reason and having the herd mentality… I actually waited for my pattern to show up… and I spotted a clear entry.
Not only that, I had a trading plan and stuck to it. Basically, I knew where I was going to buy the stock, stop out, and take profits.
When you’re impatient, you actually don’t have the time to develop a well-thought-out trading plan.
I had WKHS on my watchlist, which I sent out to clients… not only that, I let them know when I was getting into the stock.
In just about 2 weeks, WKHS actually ran up higher, and I was able to lock in 30% on the trade.
(You could achieve the same returns if you know what you’re looking for… click here to find out how you can use the Horizon Line to find trades like these.)
As you can see, being impatient, having FOMO, and just buying momentum stocks without any real thoughts behind the trade can actually hurt you more than it can help you.
Now, there’s one quick fix for that… remaining patient and spotting the pattern. If you want to learn how I was able to spot these winners in momentum stocks, then you should check out my most recent presentation on the Horizon Line.