Momentum trading is a strategy that aims to profit from an ongoing market trend. The trader buys an asset when its value is rising and sells it when it reaches its highest point.
Momentum trading is based on the idea that strong price moves, up or down, usually keep going in the same direction. The trader tries to take advantage of this trend to make profits before it fades.
Founder of momentum trading
Richard Driehaus founded Momentum Trading after starting his career as a research analyst at A.B. Becker in 1968. He became well-known for his unconventional approach, which went against the traditional principles promoted by Benjamin Graham and Warren Buffett.
It was at his investment company Driehaus Capital Management where Driehaus fully developed and put into practice his momentum-based strategy.
Other well-known momentum traders include Paul Tudor Jones, Stanley Druckenmiller, Ken Fisher, William O’Neil, Kathy Wood, and John Henry.
Key steps in momentum trading
Momentum trading requires a strong understanding of technical analysis to be able to kick off the process of trade execution.
Step 1: The momentum trader uses technical analysis to find the market or asset’s direction. Traders do this by using indicators like MACD (Moving Average Convergence Divergence), RSI (Relative Strength Index), and others.
Step 2: Once the trader identifies the trend, they wait for momentum to build. They enter the trade when the price starts moving up.
Step 3: The trader usually keeps the trade open as long as the momentum lasts. They use technical indicators to spot when momentum weakens and exit when the price starts to fall.
Step 4: Traders aim to exit before the price reverses. To do this, they often use risk management tools like stop-loss or take-profit orders to limit losses and secure profits.
The appeal and pitfalls of momentum trading
Momentum trading is popular because it lets traders take advantage of strong market movements. It allows traders to profit from what is happening right now, instead of predicting future direction.
Momentum traders aim for quick gains from sharp price movements in assets like stocks, currency pairs, commodities, and more.
Momentum trading is easy to understand, making it a good choice for beginners. However, it requires discipline and a strong focus on current market news and events.
This is not to say that momentum trading doesn’t come with its own set of challenges, it does.
For example:
- Beginners may mistakenly enter a trade after the momentum has peaked, leading to losses as the price could be on the verge of reversing. This is why traders must be able to identify optimal entry signals rather than chase the market.
- Sometimes, momentum traders focus too much on short-term momentum and overlook broader market trends, which can affect the sustainability of their positions.
- This strategy carries the risk of overtrading, with traders opening too many positions. If they can’t manage the higher trade volume, it could lead to larger, unexpected losses, especially without proper risk management.
- It can be time intensive as momentum traders have to monitor markets daily, for several hours in a day in many cases. This is to ensure that the trader can react to market moving events quickly enough without incurring losses or to capture profits.
- Traders in momentum trading may follow the crowd, chasing trends without considering the asset’s true value. This can lead to asset bubbles, which may burst suddenly when the bubble pops.
Improve your skills with a demo trading account
If you’re new to trading, particularly momentum trading, it may first be advisable to register for a demo trading account to boost your skills. A demo account simulates real market conditions for practicing entry, exit, and outcome assessment.
It also gives you the opportunity to learn more about technical analysis, a crucial component for taking trading decisions. Having the time to get comfortable with the strategy allows you to learn from your mistakes without financial risk, and adjust your trading plan, if required.
Continuous trading-related education
In addition to signing up for a demo trading account, there are other more conventional ways to acquire information about momentum trading. Most reputable forex brokers will offer their traders access to quality resources that includes blogs, eBooks, videos, webinars, and podcasts.
Traders may attend seminars and exhibitions to meet others, exchange ideas, and learn about new market or technological developments. Online forums allow traders worldwide to connect and share trading expertise.
Other factors to increase your likelihood for success
Economic calendar
Seeing as momentum traders rely more on the now rather than the future, they must be properly informed of market news, economic indicators, and key events that can trigger sudden price movements.
Aside from following news announcements, a trader will likely use an Kalendar Ekonomi for real-time economic coverage enabling traders to track and react to potential market-moving events, and to make more informed trading decisions.
Building a trading plan
Having a trading plan helps improve discipline and stay focused. The plan should include rules for how you’ll trade, entry and exit strategies, risk management, and how to choose which trades to take.
A well put together plan will also reduce the impact that emotions can have on trading. It enables the trader to remain more objective rather than make decisions driven by feelings like stress, anxiety, fear, or greed.
Improving your trading psychology
Like other quick approaches to trading, momentum trading requires a strong trading psychology to be able to deal with unexpected market volatilities and price fluctuations.
Strengthening your trading psychology can be achieved in many different ways, be this taking a break from trading, clearing your mind through exercise or mindfulness practices, etc.
Being flexible and adaptable
Market conditions can change quickly and unexpectedly. For obvious reasons, this will impact market momentum, and both short-term and long-term trends.
A momentum trader must have the ability to adapt to changing market conditions, refine their strategies, and learn from any consequent wins or mistakes.
Momentum Trading with T4Trade: Key Strategies and Growing Popularity
T4Trade is a popular global broker with clients worldwide. The broker offers top-tier, 24/5 multilingual customer support, cutting-edge trading platforms, and flexible trading conditions.
T4Trade is also a great go-to resource for traders looking to learn more about forex trading in a user-friendly way. A variety of videos, podcasts, eBooks, webinars, and videos-on-demand are curated by in-house specialists, catering to all types of traders.
T4Trade traders can also choose from a wide range of trading instruments across 6 asset classes, and enjoy flexible leverage, competitive spreads, fast trade execution and seamless deposit and withdrawal options. Traders can also choose from multiple trading accounts that best suit their needs and individual preferences.
Penafian: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
