What is Momentum Investing? (Momentum Investing tutorial)
Introduction:
Momentum investing is the buying and selling of securities that are in an uptrend and look like they will continue to be in an uptrend in the future. This strategy can be used on any timeframe (although it is generally used on shorter timeframes), and on any security because of its purely technical nature.
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Strategy 1:
This is one of many ways to implement momentum investing, and it uses support and resistance/chart patterns to do it. The idea here was to create something basic that captured upward moves relatively consistently while limiting the risk. The entry point is right above the long term resistance, when the price pulled back to retest it. The stop-loss is below the now support line, and the target is the target for the ascending triangle. While the ascending triangle isn’t needed and this could still work without it, it is an added layer of confirmation which gives the trade a higher probability of success.
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Strategy 2:
When used correctly, moving averages are a great tool and can indicate the beginning of an uptrend. In my example I drew what’s supposed to be the 50 and 100 day moving averages, but I recommend the 200 day moving average as well. The entry point is right above the breakout of the moving averages, the stop-loss is right below a support level, and the target is the highest resistance on the chart.
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Advantages:
Momentum investing has a couple of advantages, and here are three of them.
1. It can be used on many different types of securities, including; stocks, commodities, futures, options, cryptocurrency, and more.
2. It is a purely technical strategy, which means there’s no time spent on researching the company and checking its financial position.*
3. It is easy to learn and apply correctly, as long as you have good risk management and rules stating when you will or will not take a trade.
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Disadvantages:
Despite the good things momentum has going for it, there are definitely some disadvantages.
1. Purely technical strategies are inherently risky, since they don’t factor in the fundamental aspects of a company and the stock market is very volatile. Not having the proper mindset going into this strategy will result in losses.
2. It is generally a short term trading strategy, which may or may not be a disadvantage depending on whether or not your a full time trader.
3. There will be multiple losses in a row in any strategy, but I decided to make a special point of it here because, again, the proper mindset is crucial. Without it, any time you lose 10% of your account after 5 losing trades you will give up the strategy, when in reality it was just going through a losing streak and it still works.
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Final thoughts:
Momentum investing is based around one simple concept; the idea that the trend is your friend. Following the trend is thought to provide above average returns to the people who do it right. No, I’m not saying that you should buy high and sell low, or give in to greed and fear. I’m saying you should buy high and sell higher, get in when greed is starting to set in and selling when it’s at its peak, (or when the price is at it’s highest). I hope you learned something today, and good luck and great trading!
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*While you don’t have to research a companies financial position when momentum investing, it is recommended if you plan to hold onto the stock for any longer than a month.
Links are down below to my two other educational posts concerning growth and value investing.
Momentum investing is the buying and selling of securities that are in an uptrend and look like they will continue to be in an uptrend in the future. This strategy can be used on any timeframe (although it is generally used on shorter timeframes), and on any security because of its purely technical nature.
——————————————————————————————————————————————————————————————
Strategy 1:
This is one of many ways to implement momentum investing, and it uses support and resistance/chart patterns to do it. The idea here was to create something basic that captured upward moves relatively consistently while limiting the risk. The entry point is right above the long term resistance, when the price pulled back to retest it. The stop-loss is below the now support line, and the target is the target for the ascending triangle. While the ascending triangle isn’t needed and this could still work without it, it is an added layer of confirmation which gives the trade a higher probability of success.
——————————————————————————————————————————————————————————————
Strategy 2:
When used correctly, moving averages are a great tool and can indicate the beginning of an uptrend. In my example I drew what’s supposed to be the 50 and 100 day moving averages, but I recommend the 200 day moving average as well. The entry point is right above the breakout of the moving averages, the stop-loss is right below a support level, and the target is the highest resistance on the chart.
——————————————————————————————————————————————————————————————
Advantages:
Momentum investing has a couple of advantages, and here are three of them.
1. It can be used on many different types of securities, including; stocks, commodities, futures, options, cryptocurrency, and more.
2. It is a purely technical strategy, which means there’s no time spent on researching the company and checking its financial position.*
3. It is easy to learn and apply correctly, as long as you have good risk management and rules stating when you will or will not take a trade.
——————————————————————————————————————————————————————————————
Disadvantages:
Despite the good things momentum has going for it, there are definitely some disadvantages.
1. Purely technical strategies are inherently risky, since they don’t factor in the fundamental aspects of a company and the stock market is very volatile. Not having the proper mindset going into this strategy will result in losses.
2. It is generally a short term trading strategy, which may or may not be a disadvantage depending on whether or not your a full time trader.
3. There will be multiple losses in a row in any strategy, but I decided to make a special point of it here because, again, the proper mindset is crucial. Without it, any time you lose 10% of your account after 5 losing trades you will give up the strategy, when in reality it was just going through a losing streak and it still works.
——————————————————————————————————————————————————————————————
Final thoughts:
Momentum investing is based around one simple concept; the idea that the trend is your friend. Following the trend is thought to provide above average returns to the people who do it right. No, I’m not saying that you should buy high and sell low, or give in to greed and fear. I’m saying you should buy high and sell higher, get in when greed is starting to set in and selling when it’s at its peak, (or when the price is at it’s highest). I hope you learned something today, and good luck and great trading!
——————————————————————————————————————————————————————————————
*While you don’t have to research a companies financial position when momentum investing, it is recommended if you plan to hold onto the stock for any longer than a month.
Links are down below to my two other educational posts concerning growth and value investing.
