What seems more like a knee-jerk response to any relevant information in the markets is also known as momentum trading. This is, infact, a popular strategy that traders use and involves the selling of losing stocks and favouring the purchase of winning ones. However, this way of trading is completely in contrast to words of wisdom from Wall Street itself, recommending you “buy at low value, sell at high”. Let’s see how momentum trading can work to a trader’s advantage.
Although not the initial trader engaging in this, Richard Driehaus made the strategy popular and named it. The philosophy behind the way of conducting trades was that more wealth could be created by “buying at high values and selling at even higher values”. The idea of waiting for stocks that were underpriced to rise, and then sell, was not an option that Driehaus was aligned with. The plan, according to Driehaus, was to sell the losing securities and allow the winners to ride the market. Meanwhile, traders could reinvest wealth from the losing securities in stocks that showed potential to rise in value. Several techniques such as these became the crux of what is momentum trading today.
So now you have a rough idea of the answer to the question, “What is momentum investing?”, you should know this strategy in more detail. What momentum investing aims to do is to take advantage of volatility in the markets. It does this by availing short-term stock positions for stocks that are gradually on the upswing, and selling these as soon as they display signs of declining in value. After this, investors and traders shift their funds to newer positions. Consider that, in momentum stock trading, the volatility of the market is akin to ocean waves. A momentum trader sails on a wave, then hops on the next wave before the previous one goes tumbling down.
Want to know more? You can always open demat account at Motilal Oswal to trade and invest today, and start looking at videos on different trading strategies. Nonetheless, you should realise that this strategy involves a sophisticated degree of management of risk, in terms of understanding rules to do with overcrowding, volatility of markets, and traps hidden to decrease your profit. The following elements, therefore, must be considered while executing momentum trading strategy:
- Choose your securities appropriately.
- Get a grip on risks that revolve around timing regarding the open and close of trades.
- Early entry into the trade is suggested for this strategy to work.
You can easily try your hand at momentum trading with a reputable broker like Motilal Oswal. It is important to note, though, that you should select securities that are volatile and liquid. This means that it is imperative to choose individual stocks, and not mutual funds or ETFs.
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