Momentum Trading: A Few Things To Consider

Momentum trading is currently one of the most popular types of trading. It is specially popular among new investors, which perceive momentum trading as a rather easy-to-apply strategy.

Depending on the speed assets (stocks, currencies, futures…) are moving in the market, a momentum trader will hold an open position for minutes to days.

It will also depend on which time frame the trader operates. For instance, a long-term momentum trader will focus on solid trends that could take months to become really profitable.

What is momentum trading?

Momentum investing is an strategy that focuses on trends in the market. A momentum trader opens long positions to take advantage of an active upward trend. On the contrary, the trader will sell the asset when facing a downward trend.

The logic behind momentum trading is not difficult to understand. Have you ever heard about the risks of betting against the trend? That’s mainly it. Momentum traders believe in a vast majority of contexts, it is more profitable to ride trends that looking for breakpoints and turns.

Which are the two types of momentum traders?

1. Technical momentum trader

Technicals-based momentum traders base their decisions on indicators that tell them whether an assets is trading higher or lower than it should. In the first scenario, a trader would opt for a short position to take profits as the asset corrects lower. An opposite scenario applies when an asset traders lower than it should.

2. Fundamental momentum trader

A fundamental-based momentum trader base their decisions on news and events that have the power to move asset prices upside down. High-impact news create volatility, which is seen as an opportunity to take advantage of sudden momentary spikes in quotes.

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