Trading with the Momentum Indicator in the Stock Market: A Guide
Trading the Momentum indicator is less like an investment strategy and more like a trick to respond to market news. It is true that buying green and selling red may seem a counterproductive notion, but it does not necessarily go against the golden rule of trading, which is to buy at least. expensive to resell at the most expensive. We have written this article to enable you to get the most out of this indicator, while at the same time clarifying its most salient flaws.
The main thing to remember about Momentum
Momentum’s basic indications are clear and quite easy to detect.
To define Momentum trading, we can say that it is a strategy that allows traders to buy stock assets that are rising in price, only to resell them when they begin to fall. The objective of such a maneuver is to work the volatility to find short term investment opportunities, before reselling as soon as the price begins to lose its intensity (which is Momentum).
Investors can then take advantage of the gains and look for a new uptrend, before starting the process again. This model creates an infinite loop, which will allow you to constantly generate profits. In addition, one of your greatest assets is the fact that you buy green and sell red. This will open doors of opportunity and you will have no difficulty finding buyers and sellers. This dynamism is the basis for trading with Momentum.
Skilled traders know when to enter the market and when to exit. In addition, they can react in the short term, which requires careful monitoring of information, which can lead to large spikes in both directions.
However, this strategy is not without its flaws, and its greatest risk is premature migration to a new investment or late closure to another. In addition, Momentum is quite strict and requires a mastery of chartist figures.
The Momentum will not let you miss out on the most important trends or technical deviations.
Operating with competent brokers will allow you to make the most of the Momentum indicator.
The creation of the Momentum indicator
The first trader to discover this indicator was Richard Driehaus. Even if after him the Momentum has evolved a lot, Dreihaus is still its initiator and the man recognized by all for having created the Momentum. His ingenious idea of buying when the price is high and reselling when it is higher has enabled him to generate great profits throughout his career. Moreover, this approach is much more dynamic than the classic strategy of buying at a low price and waiting for the value to rise before reselling.
Driehaus simply came up with the idea of reselling the losing stock and letting the growing stock in, while reinvesting his profits from the losing stock in other stocks that are beginning to gain value. Today, most of the techniques he used to achieve his goals form the technical basis on which the Momentum Index is built.
The precepts of Momentum investment
This trading model essentially seeks to take advantage of market volatility, positioning itself in the short term on shares that gain value and reselling them as soon as they show signs of loss. The trader will then simply collect his profits and target one or more stocks that have the same characteristics to start the process over again.
In this context, market volatility acts as waves, and the trader’s objective is to switch from one wave to another, making sure to always ride the ones that have just appeared and never stay too long. on the same wave, as the latter can weaken quickly.
This combination will allow you to secure attractive benefits with minimum risk.
The essential rules for operating with Momentum:
Risk management is fundamental to the success of all traders.
The Momentum strategy requires surgical risk management to allow traders to benefit from market volatility and saturation, without falling into traps that risk losing a large portion of their investment capital. However, many novices, blinded by the fear of losing great investment opportunities, end up ignoring the fundamental and vital steps to successful trading. Here is the summary of the most important points to follow:
- Select the financial instruments you wish to trade.
- Manage the risks associated with opening and closing your positions.
- Make sure you do not enter the market too early.
- Before investing, consider the spreads, which can significantly affect your earnings.
- Constantly check the stock charts before leaving your market position.
As you know, to use the Momentum indicator perfectly, you will need an extremely volatile market. In addition, the latter must be highly liquid, so that you can choose the most expensive stocks. It is therefore strongly recommended that you stick to those whose trading volumes exceed 5 million shares per day.
How do you choose which shares to trade?
If you are going to take advantage of the Momentum indicator, it is imperative that you look for highly liquid stocks to implement your strategy. In this context, leverage and reverse ETFs will not help you. In fact, their price movements are not accurate and do not follow indices or future markets, due to the complexity of their fund composition.
Classic funds are excellent trading assets, but their stock movements are too slow to be of interest to Momentum traders. Instead, try to find shares that trade over 5 million shares every day. Fortunately, several popular stocks meet these selection criteria.
For this reason, it is important to be active as soon as the markets are opened and to monitor stock price developments closely. This will allow you to invest in the most profitable financial instruments and maximize your profits considerably. Since this process will not increase your risk, you can apply it constantly.