Momentum Trading

What is momentum trading?

Momentum trading is the practice of trying to make money by trading stocks along with a trend. For example, if a stock is soaring after releasing a stellar earnings report, a momentum trader might try to buy shares and ride the stock's price higher. Or, for a very relevant example in the modern stock market, if a stock's price starts to rise because of a rumored short squeeze, momentum traders might buy shares with the hope that the short squeeze continues to push the price higher.

In physics, momentum is defined as the quantity of motion of a moving body. For example, you could say that an accelerating car is "gaining momentum." This definition is also sometimes applied to non-physical situations such as investing.

Momentum trading is an investing strategy that seeks to capitalize on directional trends in a stock price. These trends can be caused by tangible events or catalysts (such as earnings reports, analyst or expert upgrades, etc.), or they can be more technical in nature. In fact, one of the core principles of technical analysis is to use patterns and indicators to detect trends other investors can't see.

Momentum trading can refer to either long-term or short-term types of stock trading. For example, the meme stock rallies we've seen in recent years are forms of short-term trading, as is trading based on a company's earnings report. But there are also momentum stocks that are clearly on longer-term uptrends. There's a solid argument to be made that IRCTC, IEX, Adani Group stocks have been a momentum stock for years. Longer-term momentum trading is often referred to as "position trading," while intermediate-term momentum trading can be called "swing trading." Day trading is the short-term version of momentum trading.

Here's a key takeaway. The goal of fundamental-driven, long-term investing is often described as "buy low, sell high." On the other hand, the goal of momentum trading is to "buy high, and sell even higher."

source: matthew frankel, CFP®, the motley fool

IEX Chart


Adani Enterprises Chart

Benefits of Momentum Trading

The benefits of momentum trading include:

  1. It is a simple strategy: All you need to do is observe the momentum of the trend.

  2. You can earn a higher profit in a short period.

  3. The market’s volatility works to your advantage.

  4. You can leverage the emotional decisions of other traders.

  5. The cost of momentum trading is lower as well.

If you want to learn how to make money by momentum Trading with simple tools and rule-based systematic approach