In a sense, investing isn’t complicated. Most of us are aware of the fact that cash, when left to its own devices, will grow less valuable. This is because inflation will reduce the amount of spending power that we have. So, we should put our money somewhere where it will accrue interest, ideally enough interest to offset — or even beat — inflation. Investing in stocks, bonds, and other investment vehicles is the best way to do that. And, because the stock market generally goes up over time, we know that we can invest reasonably well simply by putting cash in index funds or using other means to track and grow with the market.
But, of course, investing can also be a lot more complicated than that. It’s nice to be a part of the market, but it’s even nicer to beat the market — that is, to have your own cash grow faster than the market is as a whole (or grow when the market is having a downturn). And doing that will require you to do more than just tag along with major market indices. You’ll have to learn some more complex investing strategies, and momentum trading is among the most important to know about.
Source: TodayTrader
What does “momentum trading” mean?
Momentum trading is a strategy for trading investments. This particular strategy can be complex in execution, but it’s all based on a deceptively simple idea. Simply put, the big concept behind momentum trading is that stocks and other investments tend to keep moving in whatever direction they’re already going until “momentum” slows.
In other words, a stock that has seen its price go way up every day for a month is probably going to see its price keep going up, at least for a while. So, in the view of an investor who subscribes to the momentum trading school of thought (and absent some other compelling reason to avoid it), it’s a decent idea to buy that stock and enjoy the continued growth. When growth slows, the momentum trader bails out.
Momentum traders are careful, of course, and use calculations to determine exactly what they’re doing and why. But the gist of momentum trading really is simple. You ride out the momentum of stocks and bet for or against them (as appropriate), then use the warning of waning momentum to get away cleanly before the trend actually changes direction.
Source: TodayTrader
Momentum trading and risks
Of course, there have been plenty of times over the course of history that a stock — or even an entire market — seemed to defy momentum and switch directions very quickly. But it is also true that momentum trading has made some investors into massive successes, and has been doing so for hundreds of years. British economist David Ricardo was using momentum trading strategies as far back as the 1700s.
If you’re going to get into momentum trading, you’ll need to study up. Learn the basics and keep reading until you’re comfortable with your chosen strategies. Keep up-to-date on all of the latest financial news. This isn’t an amateur’s strategy, but you can use it properly if you’re careful and dedicated!
You should also be sure to cultivate an emergency fund and to invest much of your long-term savings in slow-growth areas (or keep it in the safety of a savings account). The higher risks of more active trading styles can mean larger rewards, but don’t forget that they mean bigger risks, too!
Momentum trading isn’t your only option for more active trading, but it is a powerful strategy for next-level investors. Learn more and make your next moves carefully!
Source: Trader Ammo
