How to Find Momentum Stocks – Step-by-Step Guide

Momentum investing has gained popularity because it focuses on finding stocks that are already showing price strength and are likely to continue moving in the same direction. A recent example is KEI Industries, which has shown an uptrend over the past few years. Its growing order book, rising dealer network, and improving margins become visible in the price trend even before the quarterly or annual results are announced.
In a market that changes quickly, participating in stocks with clear trends, high volumes, and market catalysts helps you make more reliable and confident trades. This guide explains how you can spot momentum stocks, analyse them, and avoid common mistakes to improve timing and consistency.

What Are Momentum Stocks?

Stocks that show strong upward (or downward) movement in price due to high trading volume and market interest are known as momentum stocks. Investing in them allows you to ride the market trends that are active right now.

Momentum stocks stand out because they show clear demand from the traders, investors, and institutional buyers. When a stock consistently outperforms its peers or benchmark indices, it indicates growing participation and surging market confidence. This makes momentum a practical strategy for those who want to follow ongoing trends.

For example, Integrated Industries has delivered a rally of 5300% in the last five years. Its momentum has been supported by growing order values, operational efficiency, and rising investor interest. The stock even hit upper circuit for two consecutive days, reflecting market confidence.

Why Momentum Stocks Matter for Traders & Investors

Momentum stocks are useful as they offer direction, structure, and clarity in the markets. The reasons they matter for both the traders and investors are given below:

1. Clarity in Volatile Markets

During volatile periods, momentum stocks help in identifying stocks with clear and consistent trends. It provides reliable direction that filters out the distractions and aids in setting better targets.

Example: Hindustan Aeronautics Ltd. (HAL) continued to show steady upward momentum during the volatile market swings in 2023-2024.

2. Indicator of Fundamental Strength

Momentum is typically seen in stocks of businesses with fundamental strength. The prices start to rise well before any news or results are announced, and charts show increasing demand in the market. The investors have an early chance of entering the trade before the revenue, profits, and performance are widely known.

Example: Waaree Renewable Technologies has shown strong momentum recently, backed by growing orders and improved financial performance. The stock has risen as investors have noticed the business growth and rising demand in the renewable energy sector.

3. Reflects Institutional Confidence

Institutional investors – Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) build their positions gradually, which results in sustainable trends. The impact of institutional investors is seen in rising prices and increasing trading volume. By aligning with them, retail traders and investors can enjoy consistent returns.

Example: Persistent Systems has displayed momentum driven by institutional confidence – FIIs and DIIs have steadily increased their stakes, which is reflected in a smooth, volume-backed uptrend.

4. Improves Decision-Making

Stocks with strong momentum create better chart patterns, which makes it easier for traders to identify the support levels and set the stop losses. Since the momentum makes the trend more reliable, there are lower chances of price reversal, and the traders can make more confident decisions.

5. Encourages Discipline

Momentum strategies help traders in making informed decisions rather than relying on predictions. The positions are only entered when the trend, volume, and fundamental strength are aligned, which reduces emotional trading. This approach helps the traders maintain discipline and avoid impulsive decisions.

Key Characteristics & Indicators of Momentum Stocks

Momentum is not just a short-term spike in the price. It is a mixture of price strength, volume, technical trends, and market sentiment. When these elements work in harmony, only then does a stock gain momentum. Let’s take a look at the most important indicators:

Price & Relative Strength (RS)

The stock price must consistently move in one direction to gain momentum – either upward or downward – to be considered as gaining momentum.

The relative strength (RS) shows how a stock is performing in comparison to the broader market. Stocks with high RS are usually the ones that gain momentum during strong market phases.

Volume Surge & Confirmation

Volume refers to the frequency at which the stock is being traded. Momentum is meaningless without volume, as the volume reflects the conviction of buyers.
If the volume is increasing on the days the price is rising and decreasing when the price falls, the momentum is considered to be healthy.

Technical Trends: Moving Averages, RSI, MACD

Several technical indicators can be used to identify whether the stocks are gaining momentum:

• Moving Averages: The moving averages even out the fluctuations and show the price trend over a specified time period. Rising prices over different moving averages signal a strong trend and momentum in the stock.
• Relative Strength Index (RSI): The RSI is a tool that measures the rate and direction of changes in a stock price. When both the price and RSI rise simultaneously, the trend is considered healthy. However, if the RSI is falling even when the prices are rising, it hints that the trend may be weak.
  RSI scores over 70 mean the stock is overbought, and under 30 means it is oversold.
• MACD: The Moving Average Convergence Divergence (MACD) helps in seeing the shifts in momentum by comparing two different moving averages of a stock.
  When a short-term moving average outperforms a long-term moving average, it is a signal that the stock is gaining momentum.

Catalysts & Market Sentiment

Momentum thrives when the market sentiment supports the price trend. Some of the common catalysts include:

• FIIs & DIIs
• Macroeconomic shifts
• New product launches
• Sector rotation (e.g., IT, renewables, FMCG)
• Positive media attention

Step-by-Step Roadmap to Find Momentum Stocks

To find a momentum stock, you should take a structured approach that offers clarity and direction. The step-by-step roadmap that you can follow is given below:

Step 1: Use Screeners/Filters to Build a Watchlist

To begin, you scan the markets using tools such as TradingView and Screener. These tools can help you create a list of potential momentum stocks with the help of different filters. You can apply filters such as volume, price change percentage, RSI, Price-to-earnings (P/E) ratio, market cap, etc.

Step 2: Qualitative Check – Sector, Catalyst, News

Once you have a list, check the stocks based on their qualitative aspects, such as sectoral growth, media attention, institutional buying, or any other positive catalyst. When a momentum is backed by catalysts, it becomes far more reliable and tends to sustain for a longer period.

Step 3: Chart Analysis & Confirm Entry Setup

The next step is to study the chart patterns to get a clearer picture of the trend. Hourly, daily, weekly, and monthly review helps in confirming the momentum’s strength. This allows you to mark the support levels and accordingly set your entry and exit points.

Step 4: Use Tool Stoxo AI to Automate & Monitor Momentum

Stoxo AI is a research platform specifically for the Indian market, developed by Stockgro. You use it to scan the stocks in real-time to find the price-volume anomalies, check the fundamental and technical strength, and backtest your trading strategy. It can also help you in monitoring the momentum, which is useful in determining the safety zones.

Case Study: Varun Beverages Ltd. (VBL)

• Founded in 1995, VBL is one of PepsiCo’s largest bottlers and distributors of carbonated, non-carbonated drinks, and packaged water.
• In FY25, the company had sales of ₹5,567 crore and net profit of ₹731 crore, reflecting high operational efficiency.
• The company has shown strong financial momentum, delivering over 45% returns in the last five years.
• The institutional buying has also improved due to the expansion in production capacity, wider distribution network, and rising market demand.
• Backed by strong fundamentals and rising volumes, the stock has evolved into one of India’s most consistent multibaggers in recent years.

Common Mistakes & Risks When Hunting Momentum Stocks

Momentum trading can generate good returns, but sometimes the traders and investors can fall into traps. Some of the common mistakes and risks you should look out for are:

1. Entering Late After a Sharp Rally

Entering a trade after the stock has made a large move is a common mistake made by many. A higher point of entry means fewer profits. In such a situation, waiting for the prices to revert is a safer and better option.

2. Ignoring Volume

Only the rising price is not enough to build momentum. You should also check the stock’s trading volume. High volume makes the momentum more reliable. On the contrary, if volume does not support the price movement, the breakout is more likely to fail.

3. Trading Against the Market Trend

Momentum trading works best when done in the same direction as the market trend. Trying to trade against the market increases the risk and reduces the potential of your investment.

4. Skipping Timeframes

Traders often get fixated on single timeframes and miss the broader trend. By checking the charts for daily, weekly, and monthly changes, you gain a better overview of the stock’s strength and potential entry zones.

5. Trading Based Only on News

News and social media can create hype for a stock, but it seldom lasts if the stock lacks technical strength. It is important to carefully evaluate a stock, as the prices drop after the buzz wears off.

6. Not Using Stop-Loss

Many traders and investors are under the notion that momentum will continue in the future, but it can reverse quickly, putting the investment at risk of loss. Using a stop loss limits the risk and secures you in a safe position.

7. Confusing Volatility With Momentum

It is very common to confuse fast price swings for momentum. True momentum does not arise out of volatility but is a result of price movement, volume, market sentiment, and technical trends.

Conclusion

Investing in momentum stocks is a powerful method to benefit from the stocks that have already shown strength and are likely to continue in the same direction. By analysing the price-volume patterns, technical indicators, and market sentiment, and using AI tools such as Stoxo, you can find good opportunities that provide reliability and confidence.

Although momentum stocks have many benefits, falling into traps is not rare with them. It is advisable to conduct a deep analysis, following the strategy and avoiding the common mistakes, for successful momentum trading and investing.

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