InvestorQ : Does trading with momentum really help become a better trader?
Anisha Awate made post

Does trading with momentum really help become a better trader?

3 years ago

That is largely correct. Momentum is the language of the market and it is trying to tell you that there is a message for you from the market. It is your job to listen to the market momentum and tweak your trading strategy accordingly. Here is why momentum is so useful and important in your trading activity.

First and foremost, momentum help you pin point the underlying strength or weakness of the market and trade accordingly. Momentum is very useful in reducing the cost of your trades and bringing down your trading risk. You get a clear picture of the direction of trade that you should actually be adopting.

When you go against momentum, are actually fighting the collective might of the market forces. Normally, that is an exercise in futility. When you are on the side of the market you can at least be sure that you are not fighting against the collective force of the market. When you have the market on your side, you can focus more on your charts and ensure that you get your trades right down to the most granular details.

How do you reduce your costs on both sides of trading? Trading is all about reducing your cost of acquisition to the minimum and increasing your exit price to the best possible price. That is only possible if you have momentum on your side. When you are trading against momentum you are already paying a very high price for going against the market.

Momentum of markets is all encompassing. It not only covers the macros risks and macro messages but also at a micro level. Momentum takes care of the macro and the industry level factors. So, as a trader you only need to focus on the micros of the market and the stock. That makes your job a lot easier and also more meaningful.

In trading being right is more important than being smart. Your job is to make profits by trading not in proving that you are better than the market. You never are. If you focus too much on trying to outsmart the market, your focus shifts from being profitable in your trade to trying to beat the market. That is not the job of a trader at all. The trader has to focus only on being profitable and does not have to prove that he is smarter than the market. That is when you start to lose the plot.