Introduction to Trading Momentum
The momentum investment seems less like an investment strategy and more like a spontaneous reaction to market information. We will see the momentum of investment following its advantages and disadvantages. In addition to practiced in the stock market, trading momentum can also be done in the forex market.
Although not the first momentum investor, Richard Driehaus took the practice and made it the strategy he used to run the funds. The philosophy is that more money can be earned by “buying higher and selling higher” rather than buying inexpensive stocks and waiting for the market to reevaluate them. Driehaus believes to sell stocks on losers (loser stocks) and let other shares (winners’ shares) go up, while reinvesting money from losers in other stocks that are starting to heat up. Many of the techniques he uses are the basis of what is now called momentum trading.
Momentum trading attempts to take advantage of market volatility by taking short positions in rising stocks and selling them as soon as they show signs of descending, then transferring capital to new positions. In this case, market volatility is like a wave at sea and investor momentum is moving at the top one, only to jump to the next wave before the first wave drops again.
The Perfect Momentum Trading Element
Markets with momentum trading require sophisticated risk management rules to address volatility, transaction density and hidden traps that reduce profits. Market participants routinely ignore this rule, blinded by extraordinary fears, they will fail to follow rallies or sell stocks while other investors make a profit from windfall. The rules can be broken down into five elements: selection, risk, entry, management and exit.
Trading Momentum is not for everyone, but it can often produce impressive returns if done right. It takes strict discipline to trade this type of style because trade should be closed on the initial sign of weakness and funds should be immediately put into different trades that show strength.