Informational Text – What Is Momentum Trading?

Momentum trading is based on the idea that stocks moving strongly in one direction will continue moving in that direction—at least for a while. Momentum traders look for acceleration in price, usually caused by news events, earnings, analyst upgrades, or sudden increases in demand.

Momentum trading requires recognizing strength early, not waiting for deep pullbacks. These traders rely on volume to confirm that the move is genuine. If volume is weak, momentum is likely to fail. If volume is surging, strong institutional activity may be driving the move.

Because the moves are clear, fast, and dramatic, momentum trading is one of the most popular and visually intuitive trading styles for students. Charts often show strong breakouts, shallow pullbacks, and visible continuation candles that make the story of the trend easy to follow.

Scenario Example – Drug Breakthrough Momentum

A healthcare company announces a major drug breakthrough. Overnight, news spreads through the market. At the opening bell, the stock gaps up 10% on extremely high volume—about five times higher than normal.

A momentum trader watches the first several candles. Every time price pulls back, the dip is shallow and quickly bought up. Volume remains strong, and the stock holds above the breakout level.

The trader waits for the first clean pullback into support and sees a high-volume continuation candle pushing price higher. They enter the trade and ride the trend upward. As the session continues, volume slowly begins to fade and the candles lose strength. That slowdown in momentum signals it may be time to exit.

Process Summary – How Momentum Traders Operate

• Identify stocks with unusually high volume or fresh catalysts (news, earnings, upgrades, product launches).
• Confirm strength using indicators such as RSI, MACD, or other relative strength tools that show strong buying pressure.
• Enter on:
  • Breakouts through key resistance levels with strong volume.
  • Shallow pullbacks that hold above support or the breakout zone.
  • High-volume continuation candles that push the trend forward.
• Ride the trend with discipline, following price and volume behavior instead of emotion.
• Exit when momentum weakens—signaled by declining volume, reversal candles, or breaks of key support zones.

Key Vocabulary

• Volume Surge – A sudden increase in trading volume, often confirming strong momentum and institutional participation.
• Relative Strength – A measure comparing a stock’s performance to a benchmark or to other stocks; strong relative strength often signals leadership.
• Breakout – When price pushes above a key level (like resistance or a prior high) with strength and volume.
• Continuation Pattern – A chart structure (such as a flag or pennant) suggesting the existing trend will likely continue.
• Momentum Oscillator – An indicator (like RSI or MACD) that measures the speed and strength of price movement.

Cross-Strategy Vocabulary Use:

• Breakouts → Day Trading, Swing Trading, Trend Trading
• Volume Surge → Day Trading, Scalping
• Relative Strength → Swing Trading, Trend Trading

Lesson Flow – How the Session Unfolds

Learning Target: I can identify momentum setups and explain how traders use volume to confirm trend strength.

Essential Question: How do traders know when momentum is strong enough to trade?

Bell Ringer: Students examine two charts—one with strong volume and one with weak volume—and choose which shows stronger momentum. They briefly defend their choice.

Mini-Lesson: The instructor explains why volume is essential for momentum trading, how momentum differs from slower trend trading, and which catalysts (earnings, news, upgrades, product releases) typically create momentum bursts.

Modeling: The healthcare-company breakthrough example is walked through step by step. Students see where the breakout happens, how shallow pullbacks form, and how volume confirms strength at each stage.

Guided Practice: In pairs or small groups, students identify breakout levels, momentum confirmation signals (volume surges, strong candles, relative strength), and logical exit points on a sample momentum chart.

Independent Practice: Students annotate an individual momentum chart and write a paragraph explaining their entry and exit decisions, using vocabulary such as breakout, volume surge, and continuation pattern.

Closure: As a class, students answer: “Why does momentum usually slow when volume declines?” They connect volume behavior to trader interest and exhaustion.

Exit Ticket: Explain the difference between a breakout and a continuation pattern in your own words.