How to Create a Portfolio for Momentum Trading
Momentum investing is a trading strategy of investing in stocks, capitalizing on them, on the basis of market trends. Momentum trading actually goes by a stringent group of rules based on particular indicators of a technical nature that drive entry and exit points related to specific securities. Some investors have made profits by having a momentum portfolio.
- What is a momentum portfolio?
To understand what a momentum portfolio is, you need to know what momentum trading strategy involves first. Even before you do this, if you wish to trade, you have to open demat account online. You can do this on the portal of Motilal Oswal, one of India’s reputed brokers. Now coming to momentum trading, this is simply a strategy, assuming that some stocks rise in value in the short term. Stocks show a gradual rising trend, and when this happens, traders buy them. When they begin to fall, they sell them and move to stocks that show another gradual rising trend. Therefore, if investors hold a portfolio of such securities (the ones that are gaining momentum by climbing), they will offer investors good returns.
Something else to note about trading with a momentum strategy and forming a momentum portfolio, is to understand what a stock universe indicates. In any share market, there are literally thousands of securities to trade in. How do you choose which to invest in? You need to compile a list of stocks, exclusive to you as an investor. This is essentially your stock universe. This simplifies your investment, reducing distractions from other stocks. Within this universe of compiled stocks, you may find a smaller set to which you apply momentum trading strategy, tracking these accurately.
- Steps to Create a Momentum Portfolio
You may have got a good idea of momentum trading and what is involved in a momentum portfolio, but these handy steps help:
- Select your own stock universe - On the BSE, there are near 4,000 stocks listed, and approximately 1,800 on the NSE. You must choose stocks on the basis of whether they show some momentum, picking out a few for momentum trading.
- Get data - In your universe of stocks, make sure you find out the closing price values of stocks. You can go back to a year’s historical data to give you some notion of how these stocks are moving.
- Compute returns - In your stock universe, find out the returns that your stocks have historically given. Then, you can rank stocks with the highest returns at the top.
- Create the momentum portfolio - Now pick the ten top stocks, the ones that show changes in returns, but good returns, nonetheless.
- Make the Most of the Momentum
A systematic way for momentum trading to be successful is to establish a momentum portfolio. You can easily start or continue your trading career with helpful platforms like those of Motilal Oswal.
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