What Is Momentum Trading?
In momentum day trading, an investor buys rising stocks and ETFs and sells them when the price trend suggests a peak.
Hence, the best momentum trading strategy is to watch market volatility religiously.
When the stock price move is in momentum, it suggests it will increase again in the same direction. A trader can’t afford to hold the stocks for too long.
Therefore, traders read and watch out for any news that may affect the price. Many know how to gain even from spikes caused by company news. Also, momentum stock trading requires risk management strategies like stop loss.
Precepts of Momentum Investing
Price volatility is at the core of momentum stock trading. Therefore, this investment activity is a continuous process of buying, holding, and selling securities. A trader reinvests the money in new stocks and watches the market for the best time to sell.
Due to that reason, a momentum investor gains from investor herding. The trader leads investors who want to ride on the research and analysis of others. But that trader watches the market waiting for the best time to sell and exit. Hence, the trader exits before everyone who follows them in the herd, so they minimize losses.
Elements of Momentum Investing
Momentum strategy is all about lowering the risks. You can do that in the following areas.
Identify securities to buy. It should be the first thing to do, so you can start watching them immediately. Also, try individual stocks instead of mutual funds to have a more volatile investment. If possible, stick to securities that trade over 5 million shares daily.
There’s more risk when timing a trade entry and exit. As such, you might wake up to a different price if you keep a position open through the night. Also, charting can help you time your exit points correctly.