Momentum Trading

Momentum trading is an investment strategy that involves buying Securities that have shown an upward price trend and selling those that have shown a downward trend. The underlying principle is that Assets that are moving in one direction will continue to do so for some time, driven by market psychology, momentum, and trends.

Traders typically use various technical indicators, such as moving averages or relative strength Index (RSI), to identify potential momentum opportunities. The goal is to Capitalize on the existing trend rather than attempting to predict reversals.

For example, if a Stock has been consistently rising due to positive news, a momentum trader might buy in to ride the trend. Conversely, if a Stock’s price is falling sharply due to poor earnings reports, a momentum trader may short the Stock, betting that the decline will continue.

In cases like the tech boom of the late 1990s, many momentum traders profited by purchasing Shares of rapidly growing tech companies. Similarly, during market corrections, momentum traders often exit positions quickly to limit losses or go short on declining Stocks.