{"id":2895,"date":"2018-11-19T11:16:34","date_gmt":"2018-11-19T11:16:34","guid":{"rendered":"https:\/\/www.wasteyourtime.co\/?p=2895"},"modified":"2020-03-25T14:08:25","modified_gmt":"2020-03-25T14:08:25","slug":"momentum-trading","status":"publish","type":"post","link":"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/","title":{"rendered":"Momentum trading"},"content":{"rendered":"<p style=\"text-align: right;\"><i><span style=\"font-weight: 400;\">3 min read<\/span><\/i><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-2896\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/momentum-trading-e1542625309237.jpg\" alt=\"Momentum trading\" width=\"700\" height=\"347\" \/><\/p>\n<ul>\n<li><b>Momentum stocks are among the most exciting stocks to trade.<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Momentum trading refers to the tendency of stock prices to continue moving in the same direction for several months after an initial impulse. The most basic form of momentum is price momentum, where the initial impulse is simply a change in the price itself.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Momentum has been defined as a force that sustains the\u00a0movement and increases the strength of that movement. This two-fold nature of momentum is seen in what traders and investors call \u201cmomentum stocks\u201d. A momentum stock is a stock that is <a href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/what-is-trade\">trading<\/a> in a sustained trend, either up or down, the strength of which is expected to increase over the near term.<\/span><\/p>\n<blockquote><p><strong>Momentum stocks are among the most exciting stocks to trade.<\/strong><\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">Momentum trading is inherently challenging to explain within a traditional asset pricing model. Such a model requires that high average returns are simply compensation for some form of <a href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/types-of-trade\">risk<\/a>. But stocks that have risen recently, or have had positive earnings surprises. Hence, typically seem to have lower risk, not higher risk as would be required for risk to explain momentum.<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_74 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/#What_is_momentum_trading\" >What is momentum trading?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/#Momentum_trading_can_be_classified_into_two_categories\" >Momentum trading can be classified into two categories:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/#Relative_momentum_and_absolute_momentum\" >Relative momentum and absolute momentum.<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/#How_to_employ_momentum_strategy\" >How to employ momentum strategy?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/#Momentum_indicators\" >Momentum indicators<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/#Other_momentum_tools\" >Other momentum tools<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/#Is_momentum_trading_risky\" >Is momentum trading risky?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/momentum-trading\/#The_bottom_line\" >The bottom line<\/a><\/li><\/ul><\/nav><\/div>\n<h4><span class=\"ez-toc-section\" id=\"What_is_momentum_trading\"><\/span><b>What is momentum trading?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Momentum trading is a technique in which traders buy and sell according to the strength of recent price trends. Price momentum is similar to momentum in physics. The mass multiplied by velocity determines the likelihood that an object will continue on its path. In financial markets, however, momentum is determined by other factors.\u00a0 Like trading volume and the\u00a0rate of price changes. Momentum traders bet that an asset price that is moving strongly in a given direction. And it will continue to move in that direction until the trend loses strength. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">British economist and investor David Ricardo used momentum-based strategies successfully in trading. He was well known in this field. How he did it? He bought stocks with strong performing price trends. And then sold stocks whose prices were performing poorly. He characterized the method with the phrase: \u201cCut short your losses; let your profits run on.&#8221;<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Momentum_trading_can_be_classified_into_two_categories\"><\/span><b>Momentum trading can be classified into two categories:<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<h4><span class=\"ez-toc-section\" id=\"Relative_momentum_and_absolute_momentum\"><\/span><strong><i>Relative momentum and absolute momentum<\/i>.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><b>The Relative momentum<\/b><span style=\"font-weight: 400;\"> strategy is where the performance of different securities within a particular asset class are compared against one another. Investors will favor buying strong performing securities and selling weak performing securities.<\/span><br \/>\n<b><\/b><\/p>\n<p><b>The Absolute momentum <\/b><span style=\"font-weight: 400;\">strategy is where the behavior of the price of a security is compared against its previous performance in a historical time series.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In currency trading, either relative or absolute momentum can be used. But you have to know that momentum trading strategies are more frequently associated with absolute momentum.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"How_to_employ_momentum_strategy\"><\/span><b>How to employ momentum strategy?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Momentum can be determined over longer periods of weeks or months, or within day-trading time frames of minutes or hours.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The first step traders usually take is to regulate the direction of the trend in which they want to <a href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/tricks-of-the-trade\">trade<\/a>. The trader can use one of several momentum indicators. Then such trader may establish an entry point to buy (or sell) the asset they are trading. After that trader has to determine a profitable and reasonable exit point for a trade. The trade must be based on the projections. And previously observed levels of support and resistance within the market.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-2897 aligncenter\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/momentum-trading-2-e1542625355359.jpg\" alt=\"Momentum trading 1\" width=\"700\" height=\"318\" \/><br \/>\n<span style=\"font-weight: 400;\">Besides that, it is highly recommended to set stop-loss orders above or below their trade entry point. That depends on the direction of the trade. This is in order to avoid the possibility of an unexpected price-trend reversal and undesired losses.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Momentum_indicators\"><\/span><b>Momentum indicators<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">A momentum indicator is a tool used for determining the momentum of a particular asset. They are graphics devices. Often in the form of oscillators. That can show how rapidly the price of a given asset is moving in a particular direction. Also to whether the price movement is probably to continue on its course.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The idea behind the tool is that as an asset is traded, the rate of the price movement reaches a\u00a0<a href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/margin-trading\">maximum<\/a>.\u00a0In the moment when the entrance of new investors or money into a particular trade nears its maximum. When there is less new investment available, the tendency after the maximum is for the price trend to devastate or reverse direction.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-2899 aligncenter\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/momentum-trading-3-e1542625642678.jpg\" alt=\"Momentum trading 2\" width=\"700\" height=\"317\" \/><br \/>\n<span style=\"font-weight: 400;\">The trader can determine the direction of momentum. The trader has to subtract a previous price out of a current price. That&#8217;s all. A positive result is a signal of positive momentum. The negative result is a signal of negative momentum.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Momentum tools typically appear as rate-of-change (ROC) indicators, which divide the momentum result by an earlier price. Multiplying this total by 100, traders can find a percentage ROC to plot highs and lows in trends on a chart.\u00a0Say the ROC approaches one of these extremes. You can see an increasing chance the price trend will weaken and reverse directions.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Other_momentum_tools\"><\/span><b>Other momentum tools<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Here are a few of the technical indicator tools that traders commonly use to track momentum. They may provide you to know whether it\u2019s a good time to enter or exit a trade within a trend.<\/span><\/p>\n<p><b><i>Moving average<\/i><\/b><span style=\"font-weight: 400;\">: It can help to identify overall price trends and momentum. How to calculate the moving average? The trader should add the closing prices over a certain number of periods. And by dividing the result by the number of periods considered.<\/span><\/p>\n<p><b><i>Relative strength index (RSI)<\/i><\/b><span style=\"font-weight: 400;\">: It measures the strength of the current price movement over recent periods. The aim is to show the probability if the current trend is strong. Of course, in comparison to previous performance.<\/span><\/p>\n<p><b><i>Stochastic oscillator<\/i><\/b><span style=\"font-weight: 400;\">: It compares the current price of an asset with its range over a defined period of time. What we can see when the trend lines in the oscillator reach oversold conditions? They indicate an upward price momentum is at hand. And when they reach overbought conditions they indicate that sinking price momentum is ahead.<\/span><\/p>\n<p><b><i>Moving average convergence divergence (MACD)<\/i><\/b><span style=\"font-weight: 400;\">: It is an indicator that reveals both price momentum and possible price trend reversal points. When the lines are farther apart, momentum is strong. Therefore, when they are converging, momentum is slowing. That means the price is likely moving toward a reversal.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There are also other indicators like the\u00a0commodity channel index (CCI), on balance volume (OBV), stochastic momentum index (SMI), average directional index (ADX), building block.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Is_momentum_trading_risky\"><\/span><b>Is momentum trading risky?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Like any style of trading, momentum trading is risky. It\u2019s normal to be <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/03\/trading-with-success-guide-for-beginners\/\">successful<\/a> when prices follow on a trend. But the problem is that momentum traders can be caught off guard. It is happening when trends go into unexpected reversals. Hence, traders should remember a few things and adopt them:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Technical analysis bases its projections of the probability of price movements on past price trends.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Prices in the market can move in an unforeseen manner at any time due to unexpected news events. Moreover, because of fears and changes in sentiment in the market.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"The_bottom_line\"><\/span><b>The bottom line<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Momentum is a key concept that has proven valuable for determining the chances of a profitable trade. The trader may use measurements of momentum in the short and long term. They are useful in all types of trading strategies. Several technical trading tools are available to reveal the strength of trends. Also, whether a trade on a particular asset may be a good bet.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Traders should know that momentum projections are calculated using measurements of past price trends. Actual momentum and price can change at any moment.\u00a0So, it\u2019s important to take preventative measures, such as setting <a href=\"https:\/\/traders-paradise.com\/magazine\/2018\/11\/stop-loss-order\">stop-losses<\/a>.<\/span><\/p>\n<p><a href=\"https:\/\/traders-paradise.com\/magazine\/2018\/07\/money-risk-trading\/\"><b>Risk Disclosure (read carefully!)<\/b><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>3 min read Momentum stocks are among the most exciting stocks to trade. Momentum trading refers to the tendency of stock prices to continue moving in the same direction for several months after an initial impulse. The most basic form of momentum is price momentum, where the initial impulse is simply a change in the [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":2902,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1017,1012],"tags":[],"class_list":["post-2895","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-how-to-start-trading-beginners","category-traders-secrets"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Momentum trading - Traders-Paradise<\/title>\n<meta name=\"description\" content=\"Momentum trading refers to the tendency of stock prices to continue moving in the same direction for several 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