Momentum investing is a technical strategy that traders use to buy securities in the market that have been showing an upward trend for a long time now (for three to twelve months). It also aims at buying short selling with downward trends in the market.
In other words, traders like to buy securities at a high price and then wait for the market to settle on them. Then, when they feel like the securities have reached saturation, they sell them at even higher prices. The process of buying loser securities at high prices and selling them at maturity at even higher rates is what the whole momentum investing is about.
Scroll further to know more about momentum investing.
Who is the father of Momentum Investing?
Researchers recognize Richard Driehaus as the father of Momentum Investing. However, he was not the first to invest and earn momentum wealth. The practice of buying securities at high prices and earning great returns by selling them at even higher prices can be dated back to the Victorian Era.
As trading started to digitalize in the late 2000s, many new sub-variants of momentum investing were introduced, such as high-frequency trading and more. Computer-driven models introduced them.
Characteristics of Momentum Trading
Momentum trading is a lot different than regular trading. The traders in momentum and value investment do not bother about the company’s operational performance but invest based on the company’s security trends.
In simple words, they determine the price of security in the market and then buy and sell accordingly. Therefore, it is believed that securities doing well in the past three to twelve months tend to pay more return on investment.
In addition, momentum traders also like to anticipate the behavior and emotions of other investors to improve the results of momentum trading. Furthermore, it helps them to enhance their momentum trading strategies.
For more insights on momentum and value investing, Kailash Concepts published in one of their white papers comparing value investing vs momentum investing. They mentioned the differences between the two and strategies that you might want to check out.
What are the Technical Analysis Tools used in Momentum Trading?
Technical tools are the primary help for momentum traders to analyze their security and choose their assets wisely. There are several tools that they sue such as:
Trend Lines
These are technical lines used to monitor the price movement of assets. First, there are two dots placed on a price chart, then the line made between dots is studied thoroughly.
If the line shows an upward trend, it indicates the bullish trend meaning the trader should invest in the asset. However, if the line shows a downward trend, meaning that you should be selling it short or not buy it in the first place.
Moving Averages
Moving the average line helps the traders to understand the current trends while mitigating the market distractions. Minor price fluctuations majorly create distractions. The moving average lines are easy to read and understand, for example, if the price remains consistently at or above average. It means that the trend is upward. Thus you can invest accordingly.
Similarly, if the final price remains below the average line, then you should be selling the asset at that moment for earning high returns and increasing the momentum of wealth.
Stochastic Oscillator
The stochastic oscillator assists in differentiating the recent closing price of the asset and the latest prices over time. The differentiation is shown y numbers between 0to 100. While numbers above 50 depict an upward or strengthening trend. However, numbers below 50 show a downward trend, and below 20 depict oversold conditions. Similarly, numbers above 80 determine that the asset is overbought, thus, showing a bearish trend.
Conclusion
Momentum trading enables the traders to identify the price change in the asset price over time. The momentum investors focus more on the price than the long-term growth and fundamentals of the company. They use various technical analysis tools to understand the price change and recent trends in asset prices. In other words, momentum trading is a short-term investment for the traders looking to capture the ROI based on price-trend.
