What Is a Momentum Stock Trader?
A momentum stock trader trades stocks that are moving significantly in one direction on high volume. The length of time a momentum trader holds his position in a trade depends on how quickly the stock is moving.
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Identification
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Momentum stock trading is often confused with trend trading. Momentum trading is more than identifying which way a stock is trending: It is identifying stocks that are moving in one direction, on strong volume, within a specified time period.
Trading Momentum
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Stocks do not trade on technical analysis and business fundamentals alone. Financial worries, dreams, greed and fear are often the driving factors in investing. Momentum trading strategies attempt to flush out the stocks moving because of these factors.
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Volume as an Indicator
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The momentum trader uses volume as a primary indicator. When a stock becomes popular for whatever reason, and there are more buyers than sellers, the stock price tends to rise, also increasing trading activity.
Information Considerations
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Momentum trading is performed as a day-trading function and can happen relatively fast. Traders will typically have a daily "stock watch list" and stay in tune with daily news via television, message boards and websites.
Warning
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All positions, even the bad ones, must be closed by the end of the day. Failing to close positions at the end of the day and allowing them to "ride" overnight can make them susceptible to many external and uncontrollable factors, including much different trading patterns the next day.
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References
- Fear and Greed in Financial Markets: A Clinical Study of Day-Traders; Lo, Andrew, Repin, Dmitry and Steenbarger, Brett; Massachusetts Institute of Technology; May, 2005
- Price Momentum and Trading Volume; Lee, Charles and Swaminathan, Bhaskaran; Johnson Graduate School of Management; Cornell University; May 18, 1998
- Introduction to Trading: Momentum Traders; Jason Van Bergen; Investopedia.com
