Momentum trading really is a technique which uses the advantage of price movements as a foundation for launching rankings. Discover what momentum trading is, and how it works and popular momentum-based indexes you need to use to start.

Momentum Moving typical Volatility Stochastic oscillator Relative strength indicator Momentum investing
Becca Cattlin | Financial author, London

What is momentum trading?

Momentum trading is the practice of purchasing and selling assets based on the recent potency of price trends. It’s situated upon the thought when there’s enough force behind an amount movement, it is going to proceed to move around in precisely the exact same direction.

When a asset reaches a greater price, it normally brings more attention from traders and investors, which compels the industry price even greater. This continues until a lot of sellers go into industry – as an instance, when an unforeseen event makes them re think the advantage ‘s price. Once enough sellers come at the current market, the momentum varies management and certainly will induce an advantage ‘s price lower.

Momentum traders may want to spot how strong the tendency is at a given way, then start a place to make the most of their expected price change and close to the standing once the tendency starts to reduce its own strength. A momentum trader doesn’t necessarily attempt to find the top and bottom of a trend, but instead focuses on the main body of the price move. They aim to exploit market sentiment and herding – the tendency for traders to follow the majority.

Momentum in finance is based on the following key factors:

  1. Volume
  2. Volatility
  3. Time frame

Volume

Volume is the amount of a particular asset that is traded within a given time frame. Volume is not the number of transactions, but the number of assets traded – so, if five buyers purchase one asset each, it looks the same as if one buyer purchases five of the asset.

Volume is vital to momentum traders, as they need to be able to enter and exit positions quickly, which relies on there being a steady stream of buyers and sellers in the markets. If a market has a high number of buyers and sellers, it is known as a liquid market as it is easier to exchange an asset for cash. Whereas if a market has a low number of buyers and sellers, it is regarded as illiquid.

Volatility

Volatility is a momentum traders’ butter and bread. Volatility may be your level of shift in a asset’s price – when market is extremely volatile, this usually means there are Forexmnprice swings, even while market with very low volatility is still relatively stable.

Momentum traders can find volatile markets, as a way to benefit from shortterm climbs and drops within a asset’s price. As momentum trading efforts to capitalise on volatility, so it’s necessary to own a suitable risk management plan in place to shield your trades out of adverse market moves. This ought to include things like limits and stops.

Time framework

Momentum trading plans usually are centered on shortterm market motions, however the length of a trade may depend on the length of time the fad preserves its own strength. This can create is acceptable for traders that employ longer-term styles like position trading, in addition to the ones who prefer shortterm fashions, such as daytrading and trading.

Learn more about trading strategies and styles

How to start out benefitting trading

  1. Identify the advantage you’re enthusiastic about
  2. Devise a multiplayer trading plan based on technical indicators and investigation
  3. Practise trading at a secure environment working with an Forexmndemo accounts
  4. Start trading on live markets by simply launching a free account using Forexmn

Alternativelyyou may learn more on the subject of trading hints and strategies using ForexmnAcademy’s range of online classes.

Popular Visibility indicators

Momentum traders aren’t necessarily worried about the fundamentals of the underlying asset – such as its long-term growth prospects and the economic circumstances surrounding it. All a momentum trader generally cares about is price action. This is why most momentum traders rely heavily on technical analysis and indicators to determine when to enter and exit each trade.

Popular momentum indicators include:

  1. The momentum indicator
  2. The relative strength index (RSI)
  3. Moving averages
  4. The stochastic oscillator

Momentum indicator

The momentum indicator is, as you might expect, the most popular momentum indicator. It takes the most recent closing price and compares it to the previous closing price, which can be used to identify the strength of a trend.

The indicator is an oscillator; it is displayed as a single line which moves to and from a centreline of zero (or 100 on some charts). The value of the indicator line provides traders with an idea of how quickly the price is moving. For example, if the indicator gives a reading of 35, this would be a faster uptrend than a reading of 30. If the indicator gave a reading of -15, this would be a faster downtrend than a reading of -10.

Stochastic oscillator momentum strategy

If the stochastic fails to fall back to the 20 mark during a pullback, then it can be taken as a sign that the trend will continue upward. For example, looking at the price chart above, we can see that on the whole the two lines have remained above the oversold signal, and the trend has continued upward. This is an indicator that despite pullbacks, the overall momentum is up.

Momentum trading summed up

  • Momentum trading is the practise of buying and selling assets according to the recent strength of price trends
  • They will open a position to take advantage of an expected price change and close the position when the trend starts to lose its strength
  • Momentum trading is based on volume, volatility and time frames
  • Momentum trading works by enabling traders to identify the rate of change in an asset’s price or volume. As neither price or volume will continue in one direction indefinitely, momentum is usually thought of as an oscillating measure
  • Momentum traders focus on price action rather than long-term growth and fundamentals
  • Popular indicators for momentum trading include the momentum indicator, the RSI, MAs and the stochastic oscillator