While following stock momentum is a popular trading strategy, it does not guarantee success. Therefore, you should proceed with caution. It’s crucial to understand its concepts. If that’s the case, read on and learn from the insights we’ll share in this quick guide.
What is Momentum Trading?
In a nutshell, momentum trading refers to an investment strategy that emphasizes a stock price’s directional trend. Those who use a stock momentum indicator will buy stocks when they are rising. On the other hand, they will sell when the price peaks.
The premise is that after achieving momentum behind the stock’s performance, it will head in the same direction.
One of your goals in momentum trading is to look for buying opportunities. These are for assets experiencing an uptrend. But when it starts losing momentum, that’s when you find selling opportunities. Next, you’ll be looking for the next short-term uptrend and repeat the process.
Momentum Trading Strategies
One of the best momentum trading strategies is to look at volume. When there’s a high number of buyers and sellers, the market is more liquid. Therefore, exchanging an asset for cash is easy.
Alternatively, the trading strategy can look at volatility. It’s the change in the price of an asset. Most momentum traders prefer volatile markets. However, volatility can also be risky. Hence, it’s crucial to have a risk management strategy, so you can control your losses.
Lastly, a momentum trading strategy can also be based on a time frame. Most of the strategies in momentum trading focus on short-term market movements. Nonetheless, the length of time at which a trend maintains its strength can be an indicator of the trend duration.
Benefits of Momentum Investing
Looking for compelling reasons to try momentum investing? Below are some things that can convince you to trade the best momentum stocks.
- Possible High Profit in a Short Time: The keyword here is “possible”. It can be a lucrative investment.
- Leverage the Market’s Volatility: It allows investors to capitalize on volatile trends. Therefore, you can sell even before the prices become too low.
- Take Advantage of Emotional Decisions: Market trends will show when some investors are too emotional. Consequently, you can leverage their emotional decisions.
What are Momentum Stocks?
By now, you’re probably aware of momentum trading, as we discussed earlier. Momentum stocks are the same. Basically, these are stocks that seem to be moving toward momentum.
There are two main types of momentum stocks. First, you have a bullish momentum. It means that the price is rising, and investors expect it to continue doing so. On the other hand, the second type is a bearish momentum. These stocks have steadily falling prices.
How to Trade Momentum Stocks
It can be overwhelming for beginners, but if you know the fundamentals, trading momentum stocks is easy. Here’s a quick guide on how to begin:
- Start by finding the stocks to trade. One of the best things to do is use a momentum stock screener. It will simplify the process.
- Once you know the stocks to trade, determine the risks. Consequently, you should create a strategy to minimize trading risks and for controlling your losses.
- The right timing is also crucial. One of the best times to enter is when there is big news about a company. It can trigger a sudden market movement.
- Know when to exit. This is one of the most important as it has a huge impact on the profitability of the trade. If you wait too long, the stock will lose momentum, and the downtrend can be a nightmare.
- Meanwhile, if you’re new to momentum trading, consider looking for a trading platform with demo accounts. This way, you can trade without real money and practice before you move to the real deal.