Intraday stock momentum trading is a dynamic trading strategy that capitalizes on short-term stock price movements within a trading day. This is a purely data-driven approach to stock market investing that ignores stock fundamentals (such as company earnings data or economic analysis) in favor of statistical modeling of the stock price dynamics.
Preparing for Intraday Momentum Trading
Due to the short-term focus of an intraday trading strategy, trading will likely need to be automated so a brokerage account with an API, a scripting package to analyze the data (such as python/pandas for data ingestion, and a technical analysis library such as TA-lib to generate the trading signals) and an intraday stock data provider such as FirstRate Data are all required.
The scripted trading solution which ingests the data and executes trades will need to be hosted on a cloud provider. For a larger solution which analyzes multiple trading strategies a cloud virtual machine may be required but for an initial solution that will focus on a single trading strategy a serverless solution such as Google Cloud functions is a good fit.
Key Strategies in Intraday Momentum Trading
Breakouts and Breakdowns
The simplest momentum trading strategy is to use price support and resistance levels to trigger buy/sell signals.
As a stock price series evolves it will typically test and fail to break through price level barriers, these barriers become established as support and resistance levels which the price will struggle to break through. However, once a barrier or support has been breached it is a very strong signal of strong momentum, as such breakouts to the upside are strong buy signals and breakdowns are strong sell signals.
A limitation of this strategy is that this can be a very crowded trade due to the popularity of the strategy, thus a large number of competing orders will usually flood the market upon a signal. To counter this, an individual trader can focus on less liquid stock tickers (typically stocks outside the S&P500) which are less actively tracked.
Momentum Reversals
The converse to the breakout/breakdown strategies where a trader follows the current market direction, is a momentum reversal strategy where a trader is tracking signals for a sharp change in the market’s direction.
Whereas breakout/breakdown patterns are very simple to identify, momentum reversal pattern formation is much more complex and there are numerous patterns to test for such as converging triangles, pennants, head and shoulders etc. As such, it is essential to use an analysis package to quickly identify pattern formation. Trading platforms such as TradingView will often provide this type of functionality but it is usually not flexible enough for real-world intraday trading simulation, and a dedicated analysis package such as TAlib or pandas-TA would be a more suitable option.
Technical Reversals
Several technical indicators can point to a market which is over-extended and will likely reverse. This category of technical indicators are commonly referred to as oscillating indicators as they typically range between 0 to 100, with values below 20 being a sell signal and values above 80 being buy signals. For example, the RSI (Relative Strength Index) indicator measures the relative price increases versus decreases over the past 14 trading days. A high RSI value is indicative of an over-extended trend which is likely to reverse as investment flows into a stock cannot be sustained over time. For example, Tesla (TSLA) stock enjoyed a strong run in the wake of the 2024 election as the market speculated that Elon Musk’s political affiliation would benefit the company, however the stock sharply reversed after the stock’s RSI hit 84.