During your investment journey in the stock market, you must have implemented various methodologies and strategies for trading and investing in the market. The main motto of every strategy is to extract maximum profit with minimum risk. However, implementing and using these strategies requires expertise and knowledge.
The stock market is full of challenges and opportunities. As a part of successful trading journey, it is important to face those challenges to make the most out of the available opportunities. To achieve the same, investors use strategies as per their convenience. One such strategy which is used in the market is momentum trading.
Today we will take an in-depth look at momentum trading ad help you in leveraging this strategy which may help you in making fruitful investments in the market.
Table of Content
Momentum Trading Strategy
The Basics of Momentum Trading
Momentum trading is a strategy which involves trading in market assets based on their price trend strengths. Momentum trading is based on a concept, according to which, if a moving price is pushed further by a force, it will continue to move further in the same direction. In other words, if the price of a particular asset moves higher, it will definitely attract more traders and investors which will help the asset in achieving higher prices.
This strategy remains enforce until an opposite momentum is created in the market. Opposite momentum will be created when there are enough sellers in the market to dominate the buying force. This opposite momentum will force the price of the asset to reduce.
Implementing Momentum Trading Strategy
Momentum trading requires the investor to identify the momentum of trends in the market. Once the direction and strength of the trend is identified, the investor can create a position in the market with the objective of gaining from the change in the price of the asset. The position will be kept open until the strength of the momentum starts weakening.
As a momentum trader, it is important to focus on the price move rather than focusing on the high and low of the trend. Momentum traders make the most out of herd mentality and market sentiments.
Factors to be Considered for Implementing a Solid Strategy
Momentum trading strategy relies on three main factors. Let us discuss about these factors in detail.
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Volume of the Assets Traded
The first factor for implementing a momentum trading strategy is volume of the asset. Usually, volume is the number of transactions in an asset, however in terms of momentum trading, the amount of asset which is traded in a specific time frame is known as its volume. Momentum trading involves raid buying and selling and therefore here volume is considered as a very crucial factor. There should be enough buyers and sellers available in the market. A highly liquid market i.e., a market with plenty of buyers and sellers is the preferred choice of investors for momentum trading rather than illiquid market.
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Volatility in the Market Conditions
Volatility is the fuel for momentum trading. A highly volatile market means that there are huge variations in the market prices. Momentum traders make the most out of these rises and falls in the prices of assets. Momentum trading involves capitalization of this volatility in the market. However, it is important to note that high volatility will always have a higher risk associated. Therefore, it is important to have your risk profile updated before implementing momentum trading strategies. Putting stop loss wherever possible is one of the most used risk management technique by momentum traders.
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The Time Frame of the Trade
Momentum trading strategy is mainly used for short term price movements. The time frame between opening a position and closing it is known as the time frame of the trade. The time frame of the trade is an important factor for analyzing the strength of the trend.
Conclusion
As a trader in the market, you will come across numerous trading strategies and techniques, but it is important to choose the one which fits your trading style, time horizon and goals. Therefore, before choosing any strategy for trading, it is recommended to have basic knowledge and clarity about investing. If you are new to the market, you can get in touch with an investment advisor who will guide you with the basics of the market and help you in choosing the perfect trading strategy for your needs.
Happy Investing!
