Momentum Trading is a form of trading in which traders mostly focus on stocks that are moving in one direction with high volume. Momentum Traders can hold their positions for a few seconds, a few minutes, a few hours or for the whole trading day, depending on how fast the stock moves and changes the direction.
What Kind Of Stocks Would A Momentum Trader Pick?
Momentum Traders usually do their research before the market opens, and they try to narrow down on stocks that are increasing much more rapidly on higher volume as compared to the rest of the market. These traders may additionally look at stocks that are trading, even if contrary to the market, and those stocks whose movements are being pushed by external factors.
Types of Momentum Traders
There are two kinds of Momentum Traders, ‘event-based’ and ‘technicals-based’.
- Event Based Momentum Trader
This is the kind of day trader who will take decisions on the basis of market volatility that arises because of news or other incidents that might occur in the course of the trading day. There are also some forex broker who do this kind of strategy. Whenever the news breaks out, the market becomes volatile. Usually, the stocks and other financial instruments that are affected start to swing when the news breaks out, and remain like that for a little while. That is the point when momentum traders hope to gain profits by making trading moves on the fluctuating values of those financial instruments. Here, execution needs to be really fast and quick, as delay of even a single second can change the profit values around.
- Technicals Based Momentum Trader
This is the kind of day trader who makes trading decisions on the basis of the market, which can be higher or lower than expected. In other words, the trading moves are dependent on technical analysis, which is the prediction that a day trader makes for a financial instrument that is either temporarily higher than it should be (so the trader makes money by shorting now and buying later), or lower than it should be (so the day trader makes money by buying now and shorting later).