Momentum investing
Momentum trading means just that—buying stocks which have momentum, or price velocity, behind them. In other words, momentum traders bet that a stock which is moving up will keep on moving in the same direction. It often involves following ‘hot stocks’ and hoping they get even hotter. It a type of trading driven by crowd behaviour and psychology where the momentum trader believes he can jump out of a stock either before the crowd turns against it.
As it relies on anticipating trends in prices and volumes, most momentum traders use some form of technical analysis to identify opportunities. Price momentum tends to change as sentiment towards particular shares change. Momentum trading is therefore generally short to medium term in focus, although some traders try to identify longer term trends.
Further Reading
- This rather academic explanation of momentum investing explains it in some detail.
