Many investors have experienced the frustration of watching momentum stocks rise during a bull market without finding suitable entry points, making them feel worse than losses.
This article outlines a straightforward strategy for trading momentum stocks during a bull market, covering stock selection, entry point identification, and risk management for short to mid-term traders.
In bull markets, growth stocks are usually more favored than value stocks. But the question remains: how can one identify high-quality, explosive growth stocks?
The CANSLIM stock selection model by renowned growth stock investor William J. O’Neil offers a reliable approach.
This acronym stands for key indicators that blend fundamental analysis, technical trends, and market sentiment to select superior stocks.
The model focuses on picking stocks with strong short-term trends supported by solid fundamentals, filtering out stocks with poor fundamentals, and short-term speculative trading.
Investors can utilize “Stock Screener” tools on moomoo to implement the CANSLIM strategy. When setting screening criteria, flexibility is key. Parameters like market capitalization, revenue growth, and other indicators can further narrow down the selection range.
Below is the result obtained from using moomoo’s stock screener based on the CANSLIM strategy (using US stocks as an example). You can see that AI chip giant NVIDIA (NVDA), weight-loss drug titan Novo Nordisk (NVO), and cybersecurity leader CrowdStrike (CRWD) have all been selected on this list.
After reviewing the results, you can click on each stock to gather more information and further analyze their business prospects and financial conditions.
Typically, stocks selected through the CANSLIM model exhibit strong short-term trends and are often at high price levels. Blindly chasing highs might not be wise.
Therefore, investors can use technical analysis to identify potential pullback entry points. Here’s a method using Exponential Moving Averages (EMA) and Relative Strength Index (RSI):
Firstly, confirm the trend. Most stocks selected by the CANSLIM model exhibit robust short-term trends with minimal pullbacks unless unforeseen events occur. Hence, EMA12 and EMA50 can confirm the trend’s integrity.
Take the weight loss drug giant NVO as an example.
Due to robust demand for its products, NVO’s revenue and profit have surged.
As shown in the chart, since 2022, NVO’s price has consistently stayed above EMA12 and EMA50, with pullbacks finding support at EMA50, indicating a healthy uptrend.
Secondly, use RSI to identify potential buy signals. When the uptrend remains intact, if the RSI drops near the 30 line, indicating short-term oversold conditions, it might signal a potential buying opportunity.
In the case of NVO, investors should combine the use of trendline and RSI, with the former confirming the trading direction and the latter providing entry timing.
Navigating the stock market’s volatility requires careful entry point decisions to avoid substantial losses, underscoring the importance of sound risk management strategies for each trade.
In a bull market, trailing stop orders can effectively limit risk by automatically adjusting to increases in the stock’s price.
Consider the case with NVO: after pinpointing $90 as a likely entry point through EMA and RSI analysis, you proceed with a purchase at that price and place a 7% trailing stop order to protect your investment.
If the stock price falls continuously after purchase and hits $83.7, the trailing stop order is activated, and the stock is sold to mitigate losses.
Conversely, if the stock price rises, the stop price will also move up. For instance, if the price reaches $100, the stop price will roll up to $93. If the price then drops 7% to $93, the stop order is triggered, locking in profits.
Trailing stop orders are not only a means to curtail potential losses but also a way to crystallize profits early on. However, setting the stop percentage too tight could result in premature sale of the stock due to normal market fluctuations, which might cause you to forgo greater profits that could have been realized if the stock were held for longer.
Investors must recognize that no strategy guarantees success in the dynamic environment of trading. The momentum stock trading strategy, including the CANSLIM model, is no exception.
The CANSLIM model is only suitable for bull markets, with many stocks selected at or near their 52-week highs. If the market shifts, these stocks could suffer significant losses.
Investors can use the CANSLIM framework to develop their own indicators, craft their unique stock selection strategies, consistently test and refine them, and ultimately discover the approach that aligns best with their investment goals and risk tolerance.