What Are The Best Momentum Trading Strategies?

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This is a situation where traders look at a stock or another asset and jump-in in its direction. For What is Momentum Trading example, if the EUR/USD is rising, they can take advantage of the price action and buy the pair.

Momentum Day Trading Strategy

In physics, when an object moves in a particular direction, it continues to do so until an external force interferes in its motion and changes its direction. The same theory applies in trading — an asset tends to move in a specific direction until something triggers the market to react differently. Stock volume brings more momentum trading opportunities due to higher liquidity and volatility.

This means that there’s a potential to make high profits over a short period of time. Moving averages are the oldest and most common technical indicators out there. They are popular for decades to analyze all kinds of assets, and it’s all for good reasons.

Step 1 – Define your stock universe

You should know that it reflects the strength of a price trend on a graph whose line fluctuates between 0 and 100. When the reading dips below 30 suggests that the price is moving sideways.

• The MACD indicator​​ helps to decipher whether new trends are either bullish or bearish.
• As such, momentum investors can leverage the emotional decisions of other investors that ultimately cause changes in stock prices and take advantage of that.
• If the line is up, the trend is up and the momentum investor buys the stock.
• It takes the most recent closing price and compares it to the previous closing price, which can be used to identify the strength of a trend.
• Momentum trading strategies are usually focused on short-term market movements, but the duration of a trade can depend on how long the trend maintains its strength.
• Momentum is the rate of acceleration of a security’s price or volume.

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Con #1: Assets are more likely to lose value

Unlike fundamental or value investors, momentum investors are not concerned with a company’s operational performance. Moving averages are not an official momentum-based indicator, but rather a lagging indicator that helps to identify entry points for a momentum trader. Therefore, it is a good idea to use moving averages as part of your momentum trading strategy along with other technical indicators, such as those on this list. Moreover, past success is no guarantee for future price movements.