Momentum trading appears less like an investment strategy in the stock market, and more like a knee-jerk reaction to market information. Selling losers and buying winners is a seductive notion, but it flies in the face of the tried and tested adage of Wall Street, “buy cheap, sell big.”
The Father of Momentum Trading
The practice was taken by Richard Driehaus and made it into the strategy he used to run his funds.
Driehaus believed in selling the losers and letting the winners ride while reinvesting the losers’ money in other stocks that had started boiling up. Many of the techniques that he used have become the fundamentals of what is now called momentum trading.
Precepts of Momentum Trading
Momentum investing seeks to take advantage of market volatility by taking up, and selling, short-term stock positions as soon as they show signs of slowing down.
Afterwards the investor moves the capital to new positions. In this situation, market instability is like ocean waves, and a momentum trader is sailing up one’s crest. It is only to leap to the next wave before the first wave collapses again.
A momentum investor is looking to take advantage of herding investors by leading the pack in. Then, it is being the first to take the money and run. In addition, you need also learn about momentum trading strategies.
Momentum Security Selection
Regular funds make excellent trading vehicles but tend to grind against individual securities through smaller percentage gains and losses.
Whenever possible, look for securities that trade more than 5 million shares a day. Many common stocks follow these requirements. But, even low float problems, they will turn into highly volatile instruments as news flows. In addition, it has strong emotional responses draw from varied sources of market players in a period of time.
Keep watch for the “flavor of the day” when new products, divisions or concepts capture the imagination of the public, forcing analysts to throw away calculations and recalculate estimates of profit in its time frames.
Biotech firms and small to medium-sized manufacturing businesses are building a large supply of such stocks.