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Momentum Trading OverviewBefore any investor wades into the choppy waters of the markets, it is important that they be armed with strategies and information that will enable them to identify potentially lucrative trading opportunities. One of the most popular investing styles is Momentum Trading.
Momentum trading has existed for as long as markets have openly traded, and has proven to be a very valuable tool for many an investor.
Momentum Trading is an investment style that aligns investors with securities that are reacting to sentiment. The goal is to take advantage of any short-term or long-term opportunities provided by the prevailing trend.
Momentum, within an individual security or entire sector, is a product of either anticipated or actual earnings, and is reflected in share price movement and volatility. There are plenty of circumstances that can create momentum.
Identifying Momentum
On a fundamental basis, one of the leading drivers of momentum is a healthy quarterly earnings report. When a company steps up and handily beats the street, this sends a very bullish message to the market, and investors are quick to respond, snapping up shares and sending prices higher.
Momentum can be born out of technical formations as well. This frequently happens when a company's stock price crosses a particularly sensitive price point, a 52-week high for example. The market perceives this as an indicator that the company is progressing towards its goals and targets, and can hatch significant amounts of investor enthusiasm. At the end of the day, what is occurring in a chart formation is a reflection of the fundamental strength of a company.
When these kinds of signals concerning a company, a strong quarter or a new 52-week high, hit the Street, investors aggressively pursue the enticing opportunity, and its share price frequently begins an upward trajectory that has no defined timeline or expiration.
This is when momentum investors initiate their positions, when a trend is either in its early stages or showing no sign of slowing down. Consequently, the objective of the momentum trade is to stay with the trend, or carry any respective position, as long as the trend, or momentum, remains in tact.
Which leads to the next aspect of momentum trading, and that is timing. As previously mentioned, momentum trades do not carry any intrinsic time barriers or limitations, but they do however require that an investor stay very vigilant of price activity, and close out any positions that appear to be faltering or losing steam. A momentum trade, by definition, feeds off of market exuberance, whether it is real or imagined. When that sizzle begins to fizzle, and prices start to breakdown and trail-off, that is the key signal that the momentum investor is looking for to move on to the next opportunity.
Develop Your Own Style
Momentum trading can take many forms, but it is built upon a foundation of enthusiasm and market sentiment, that is most frequently born out of actual or anticipated earnings. Developing an investing or trading style that suits an investors personal preferences and parameters is essentially the most important component of any productive momentum trading ideology.
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