InvestorQ : What are momentum trading strategies and how to apply them while trading? Are there any risks in momentum trading?
sara Kunju made post

What are momentum trading strategies and how to apply them while trading? Are there any risks in momentum trading?

Answer
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1 year ago


Momentum trading is based on the premise that trends will continue to head in the same direction because of the momentum that is already behind them. The most common form of momentum is the price momentum. If you're looking at price momentum, you're going to be looking at stocks that are continuously going up on a daily, weekly and monthly basis. That is what momentum is all about. Momentum trading carries a degree of volatility compared to other strategies. Therefore, if buys and sells are not timed correctly, they may result in significant losses. That is the reason momentum traders use stop loss option protection and profit targets to minimize risk.

A successful momentum trader must be able to identify the best sectors quickly and accurately. You can probably do this manually with many screeners out there, but the basic steps you need to follow are enumerated as under are as follows:

· Start off by shortlisting and identifying the stocks that you are interested in investing in

· Secondly, you must determine the number of stocks trading close to their yearly highs

· Then sort the chosen stocks from highest to lowest to see which is performing best

· Fourthly, have an entry strategy. You may want to enter when an instrument is showing short-term strength or wait for a pullback and buy on weakness.

· Lastly, put in place an exit strategy. Be clear right in the beginning about the point you will take profits or if required you will exit with a loss.

The steps of momentum trading are incomplete if you do not appreciation the risks of momentum trading. Momentum trading involves a good deal of risk because you are making a decision to invest based on recent buying trend by other market participants. For example, a news development may impact investor market perception and lead to widespread selling. Alternatively, if many investors are already holding a long position in the ETF or stock, it's possible that profit-taking on existing positions will force prices down.