Momentum trading strategies
Momentum trading strategies
The fact that Momentum trading has worked great across market history accounts for its immense popularity. However a raw momentum strategy can be disastrous for you since it piles one into either expensive or very poor quality stocks. After having dealt with the innumerable market blowups, a number of investors are expressing doubt about the simple strategy of purchasing a stock index and waiting for the market to enrich as their retirement time approaches. In order to build wealth a more active strategy needs to be formulated in order to make sure that a down market doesn’t wreck one’s savings. In this article we are going to discuss a few momentum training strategies which are bound to benefit the buyer.
Value investing is a popular accepted approach to Momentum trading which is being advocated by some of the most successful investors like Bill Miller and Warren Buffett. The process of value investing involves a thorough research of the companies and identifying those who have bold fundamentals which are not yet being appreciated by the market. One can buy them at a bargain price and as soon as the market comes round their valuation would increase many times so that one can sell those stocks for a greater price. Momentum trading strategy involves looking for strong stocks which are more likely to trade high. This implies purchasing of stocks which has dropped the least. As soon as they lose momentum one gets out of his position.
A better way of demonstrating a momentum trading strategy is to take a look at the daily routine of a momentum trader. He generally wakes up an hour before the market is up and logs in to one of the trading message boards or chat rooms, while concentrating on stocks which are creating a considerable buzz. He needs to check the stocks which are the focus of the trade alerts or recommendations of analysts. These stocks are expected to deliver important price movements on a rather high volume for that particular trading day. Apart for web surfing he also needs to turn on CNBC and look out for mention of companies which might be undergoing significant movement or releasing news.
He also needs to go through the pages of equity options in order to locate the stocks the volume of which has increased significantly in calls. This is because an increase in written calls demonstrates the possibility of an increase or decrease of price above or below the option premium. As soon as the market opens he needs to watch the initial stock lists relating to the rest of the market. He needs to check if his stocks are going up when the market is down, if their price is increasing significantly in comparison to the rest of the market, if they are acting according to his expectations based on his pre market assessment. Moreover he needs to narrow down his list and include only the strongest of the stocks which have been increasing much quickly on higher volume, which have been trading contrary to the market and whose movements are surely being propelled by external factors. These are only some popular ways of planning a strategy for momentum trading.