One of the hardest things to deal with in short-term momentum trading is trying to keep your emotions in check. Because I am primarily a small-cap trader, I deal with a lot of volatility. So, I have more than a passing familiarity with a momentum indicator called the 50 percent rule. If there were a sure-fire way to take the emotions out of the trade, this would be it. I call this my “emotion buster” system.

Why do I call it this? Because it does exactly that; it takes the emotions out of trading. Let’s get straight to the point and not waste any time. The first thing is understanding the two primary mechanics of this system.

#1: It has to be done with candlestick charts. You’re probably wondering why that’s so. The chart illustrations shown subsequently will clear that right up. But, here are the words to go with the pictures:

Candlesticks are very visual in what they present and represent. Candlestick charting focuses on two things: The open and the close. In any of my explanations, you will hear me talking about bullish green candles. I must see green candles on my charts because green candles mean that the price action is trading above the opening price and that there is momentum and bullish volatility.

On the first day of a volatility breakout day (BIG green candle), we are looking for the open and low to be at the lower range of the day. Then, we want to see it go straight up, making what we call a power move. 

#2: Closes on stocks should continue to close above 50 percent of the daily range for strong momentum. If a stock trades at a low of $20 and a high of $21, we are looking for the stock that we are trading to close in the upper range of every trading day as long as the momentum is there.

In the example accompanying this article, we would want a close above 21.50. This is our 50 percent rule closing range for the day. You’re taking the high / low daily range, dividing it by two and looking for the closes on stocks to continue to close above 50 percent of this daily range for strong momentum.

We are going to use the 50 percent rule in two different situations. One is a big board stock we’re looking at while the other is a small-cap stock. This way, you can see that it works in any situation.

For our first chart, we will use NVIDIA Corporation (NVDA) as our example:

NVDA: You can see that NVIDIA starts its run on March 23 and closes with a nice green candle at the trend line break. On March 24, the stock breaks above its symmetrical pattern and breaks out on a huge green candle. Where the open and low of the day are equal, we have our ultimate 50 percent rule breakout.

I have drawn the red lines for you, showing you each day where the close had to be. For five straight days, the stock never closes below 50 percent of its daily range, which is very strong momentum.

See? There was no need to panic. There were no emotions involved. The stock closed up above 50 percent of its daily range. All you had to do is ring the cash register. The emotion buster worked again.

Let’s go to our second example. This one is for those of you who don’t think you can make a killing on small-cap stocks. This move is just another day at the office for those of us who do believe this is possible.

RSHN: This is a small-cap stock that made huge profits for breakouttrading.net members in the month of March 2006. If you look at the chart, you will see that, on February 24, you have your first volatility breakout candle. It breaks above the base, its previous channel. We now have the ultimate 50 percent rule breakout. We get the ultimate set-up, where the open and low of the day are equal, telling us that the move was coming.

The stock pops its head above the channel and retraces no more than 50 percent of the green candle from February 24. The 50 percent rule holds. Again, let me emphasize what we are looking for. This is not Fibonacci. We are measuring momentum, a measurement of how strong the move is going to be. So, we continue to trend higher.

On March 10, the 50 percent rule is challenged (the first red line above the channel). You can see the March 10 green candle was a wide-range volatility day. The price action retraced that candle by 50 percent and held.

Again, we’ve taken the emotions out of the trade. Each red line, all the way up, represented a stop loss area. You can see that we remained in the trade all the way up until the very end. As a matter of fact, the stock in the month of March was up 800 percent.

Now you understand why we use this technique with candlestick charting. It becomes very clear, when you see a chart, where the focus should be in the trades. And, again, this is not Fibonacci, but, rather, momentum at work. This is how we measure the strength of a stock and momentum.

To capture a big move at the small-cap level requires this type of technique. This is the only way to keep your emotions in check while trying to capture a big move, the dream move, the move we all dream about. Guess what? It can happen to you using this strategy.