There are several benefits to be gained from trading momentum. However, this is not necessarily suitable for many people. May include you. Is momentum trading right for you? Here are some advantages and disadvantages of trading momentum.
Excess Momentum Trading
High profit potential in a short time. There is a favorable position from momentum trading. For example, let’s say you buy stocks that grow from $ 50 to $ 75 based on overly positive analyst reports. You then sell with a 50% profit before the stock price corrects itself. You have returned 50% for several weeks or months (not annual returns). Over time, the potential for profit increases by using momentum trading can be huge.
Utilize market volatility to your advantage. The key to momentum trading is being able to capitalize on volatile market trends. Momentum trading looks for shares to invest on the way up and then sells it before the price starts to fall back down. For such investors, being in front of the path is a way to maximize ROI.
Make use of other investors’ emotional decisions. The whole idea of momentum trading is built in. However, investors’ momentum does this systematically which includes a certain level of buying and selling levels. Rather than being controlled by an emotional response to stock prices like many investors, momentum investors seek to capitalize on stock price changes due to investor emotions.
Shortage of Trading Momentum
Risk / Return Tradeoff. Like a ship trying to sail at the top of a wave, trading momentum is always risky in making purchases correctly and can end up under water (loser / below purchase price). Most investors accept this risk as payment for a higher yield likelihood.
High Turnover. High stock turnover can be expensive in terms of cost. Although low-cost brokers are slowly putting an end to high cost issues, this is still a major concern for most beginner momentum traders.
Intensive Time. Investors using momentum trading should monitor market details every day, if not hourly. Because they are dealing with stocks that will rise and fall again, they have to plunge into the market early and quickly exit the market. This means seeing all updates to see if there is any negative news that will make investors anxious.
Sensitive Market. Trading Momentum works best in bullish markets because investors tend to work more. On the bearish market, profit margins on investment momentum shrink in line with rising investor caution.
Is it right for you?
Trading Momentum may work, but it may not be practical for all investors. As an individual investor, practicing momentum trading is likely to lead to overall portfolio losses. When you buy stocks that rise or sell stocks that fall, you will react to news longer than professionals in terms of momentum trading. They will come out and leave you and other unlucky people holding that old position. If you manage time correctly, you still need to be more aware of the cost of the rate of return and how much they will undermine your profits.