DEFINITION of 'Momo Play'

A momo play is a slang term used to represent a momentum play or opportunity. In a momo play, the trader is not interested in the company's fundamentals, but rather, the stock's short-term price movements. Momo plays are often used by day traders, swing traders, and position traders rather than buy-and-hold investors.

BREAKING DOWN 'Momo Play'

Momo plays were very popular during the 1990s and early-2000s before the advent of algorithmic trading. Traders would watch CNBC or Bloomberg News for breaking events that could lead to market volatility. If the stock started to move, they might quickly take a position based on the momentum and exit the trade shortly thereafter for a small profit. Algorithmic trading has made momo plays more difficult to capitalize on since computers are much faster at reacting to breaking news and placing trades within milliseconds.

There are many strategies that traders use to identify and capitalize on momo plays. Day traders may rely on only price and volume to gauge momentum, while swing and position traders may use more established momentum indicators.

Popular momentum indicators include: 

  • Relative Strength Index (RSI) - The RSI indicator compares the magnitude of recent gains to losses over a specified time period to measure the speed of change in price movements, or momentum.
  • Rate of Change (ROC) - The ROC indicator is the purest momentum indicator since it simply measures the percent change in price between two time periods.
  • Stochastics - Stochastic indicators compare the closing price to the high and low prices over a period of time, which provides an indication of momentum and volatility.

Momentum trading is riskier than most other strategies since it attempts to capitalize on market volatility. Traders seek to enter a trade in the direction of the prevailing trend when momentum is rising and exit the trade when momentum begins to fall. In addition, traders interested in momo plays usually use stop-loss orders and other risk management techniques to limit their downside risk.

Example of a Momo Play

A trader may identify a momo play by looking at companies with upcoming earnings announcements before the opening bell. After looking at earnings announcements, the trader may find a company that reported better than expected results with a price that's surging in pre-market trading. The trader will then look for potential areas of support and resistance, based on past price movements, and set take-profit, and stop-loss points. These points may be adjusted after the open depending on the stock's upward momentum.

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