The volatility of the market has been the topic of trading town; traders always want to minimize their risks by managing the market fluctuations. For which they research, analyze, study and predict the market instruments and their movements. To predict the technical and fundamental changes of the market, traders use indicators, trading platforms, strategies, and advanced tools.
All the listed market aspects are significant for investors, and trading strategies are the topic the article will be exploring. Here we’ll know how traders use trading strategies, what trading strategies are, and focus mainly on the momentum trading strategy.
A momentum trading strategy studies the strength of the instrument’s price. Traders buy and sell the assets on recent price trends in the market. Thus, it believes in the fact that when the price of an asset is moving with force in a certain direction, it will continue to move in the same direction for a period of time.
To understand the trading strategy better, we have discussed it in detail. So, let’s drive-in and use the strategy better.
Trading strategies are the method or process which is followed by investors to trade in instruments. There are several trading strategies in the financial market that traders can use. The trading strategy has predetermined rules and regulations supporting various aspects of the instrument and trade. This makes decision-making simple for the investors.
The trading strategy has a plan and detail of the trading instruments and their behavior for favorable investing. It has a systematic methodology with which traders can buy and sell the instruments in the market. It could be simple or complex, involving the trading style of an investor. Traders also have to acknowledge the below-stated factors for using trading strategies:
- Market capital
- Technical indicators
- Fundamental analysis
- Industry sector
- Portfolio diversification level
- Time period
- Risk tolerance level
- Tax data
Hence, traders use trading strategies with the data of the market and instrument to analyse and adhere to it accurately. Traders can even re-evaluate their trading strategies within a time frame as per the market conditions and set goals of the traders.
Best Trading Strategies
There is a list of trading strategies that are best suited for financial trading. However, traders have different trading strategies that are applicable to their trade goals. A trader takes into consideration those trading strategies which support their instrument and market. Therefore, the trading strategies are different for various market investors.
Even traders can use them in combination or individually, whichever manner is convenient. The list of best trading strategies does not include all the trading strategies but those which are frequently used by the traders for comfortable trading. Here is the list of strategies:
- Trend trading
- Range trading
- Gap trading
- Breakout trading
- Reversal trading
- Pairs trading
- Momentum trading
- Day trading
- Swing trading
- Relative strength index
Traders can use all the above or any other trading strategy individually or in a mix for desired trading conditions of the market. It is not confined to certain limits but allows the traders to form their trading styles and strategies for successful trading.
How to use Trading Strategies?
Trading strategies are essential for investing in the market. But how traders can apply it with their trading style is a simple process. Mentioned below are the steps that traders can follow to use the trading strategy with their instruments and make the right trading decisions.
So, let’s know how traders can use the trading strategies for beneficial trading.
The first step for applying trading strategies in the trade is with opening a trading account. Traders can select the online broker who has the services and products required by the trader with proper regulation. Once selected, traders can then visit the website of the broker to open an account.
For example, Investby is an excellent trading service provider that offers instruments, indicators, tools, trading platforms, trading strategies, etc. A trader can open the account by clicking on the tab to open an account and then get themselves registered to begin trading with a broker.
Next, traders can fill in the registration form with names, contact details, email addresses, country codes, and passwords. After which, traders can further provide broker information for a secure trading environment.
The information includes income source, tax details, documents information, etc. The following step is to answer the questionnaire, which has questions relating to the previous experience of trade of the trader.
In the end, traders can upload their documents with the broker for verification. Once done, the trader chooses the trading account type which supports the goals of the broker and deposits funds to begin trading.
After which, traders can download the trading platform and set their trading strategies offered by brokers. Along with this, traders can also set the indicators, tools analysis, etc., for informed trading.
With this, traders can apply the trading strategies in combination or another way, whichever suits the trader.
Momentum Trading Strategy
A momentum trading strategy is a well-known and frequently used investment strategy. When traders want to trade in momentum, they use trading strategies that support their investment. Traders buy the instruments at low prices and sell them at high value for profitable investment.
With the trading strategy, traders buy the assets or instruments when they are rising in value and sell at a low peak. This is what they call momentum trading in financial markets. Investors use it with the goal of trading in volatility with finding the right market opportunities in short-term upward trends.
Similarly, when they sell the instrument in the market, they do so when the instrument starts to lose its momentum in trade. In such a situation, the trader looks at the next short-term market opportunity with an uptrend to buy and keeps repeating the process to earn a high profit.
Using the momentum trading strategy helps traders know the entry and exit of the market to hold a trading position. They can determine the hold time period and minimize their trading risks with the strategy. Traders also have the option of reacting to short-term fluctuations, news, and updates impacting the instrument.
However, momentum trading also includes risks that make the trader get into positions early, close it too late, or get distracted by missing the market trend. Traders, therefore, have to be careful with trading strategy use and its application.
History of Momentum Trading Strategy
The inventor of momentum trading strategy is not known, but Richard Driehaus was the one who took the investment strategy to the next level with his run in funds. He practiced the strategy with his investments. In his philosophy, the trader says that buy at high and sell higher.
Traders then buy the assets at undervalue and reevaluate them in the market. He sold the instruments to the market losers and let the winners reinvest the money in other assets that had begun rising. Even he used several techniques that have become basics, making it called momentum investing.
Aspects of Momentum Trading
In momentum trading, the traders earn by taking advantage of the market fluctuations. Traders take short-term market positions that move in an upward direction and then sell it as soon as possible when they start showing downward signs. Traders invest the capital in new market positions for momentum trading.
The strategy is affected by the market volatility, and the momentum trader invests in such a situation for having high returns from their investment before it goes down in the financial market.
The momentum trading strategy has certain elements that traders should be familiar with to have comfortable trading. The trading strategy requires sophisticated risk management for dealing with market volatility, overcrowding, or any other market trap which could impact the profits.
It has these certain elements which traders can know:
- Selection of instrument
- Risks involved with opening and closing of the trade
- Entry timings
- Position management
- Holding time period (Timeframe)
- Exit points
- Consistent charting
It is the primary thing that momentum traders require as this is the base of trading in the market. Volatility is the standard of change in the price of the instrument traded. When the instrument has high volatility, it has high market price swings; in contrast, the instrument with low volatility has a stable trading environment.
Traders look for volatile market conditions for taking market advantages with the rise and fall of securities value in the market. With momentum trading, investors capitalize on volatility; for this, traders need a risk management strategy for the protection of the traders from adverse market situations. To manage this, traders can have a stop loss limit set.
The volume of the momentum trading strategy is the amount of the asset for trading within a time frame. It is the number of assets that traders invest. With this, traders can have entry and exit in the market, and it works on the basis of market conditions and trading.
If the market has a high market volume, it is called a liquid market; however, if there are low numbers of traders, it does not have liquidity.
Time frame is also an essential part of the momentum trading strategy as time plays an important role for investors. The strategies have a focused time frame which usually works with short-term trading. Although, it has a duration which could be for a long time period.
In a similar way, all other elements are included with the momentum trading strategy.
Momentum Trading Indicators
Momentum trading is mostly a technical trading strategy as it does not have fundamental factors of the instrument affecting it with the economic and growth prospects. The momentum traders are more concerned with the price action of the instrument. Thus, the strategy uses technical analysis tools and indicators for market prediction.
The indicators are the softwares that analyze the instrument with its recent closing price in comparison with the previous closing price. This helps them identify the strength of the instrument in price and trade.
A momentum indicator is an oscillator that is visualized with a single line that keeps moving up or down. Traders can study it on charts and analyze the price impact within the time frame. This helps traders know the speed of the instrument and what impact it could have on.
For example, if the indicator shows a reading above 20, it is an uptrend, whereas the reading in negative or below 20 is a signal of a downtrend. With this, traders can understand their entry and exit positions and invest.
Important momentum trading indicators are moving averages, relative strength index, and the stochastic oscillator.
Advantages of Momentum Trading Strategy
A momentum trading strategy is a helpful trading strategy that investors of short-term style can apply to their instruments. The strategy has many indicators involved to assist traders to have smooth trading and make good profits from their trade. Below we have listed the advantages that traders can enjoy:
- The potential of high profits
- Leverages market’s volatility
- Systematic trading
- Leverages emotional decisions
Drawbacks of Momentum Trading Strategy
Momentum trading strategy with benefits shares some drawbacks for investing in the market. Here we have the following few drawbacks of the strategy:
- High turnover
- Time intensive
- Market sensitive
A momentum trading strategy is a trading strategy that is designed for particular traders. The strategy is a good source of profitable trading which offers traders returns when traded properly by investors. Traders have to be disciplined and follow the trading style for earning from such a strategy.
With this strategy, traders can have regulated trading, volatility, volume, and a set time frame to make good investment decisions and know the entry and exit positions. The article has discussed the momentum trading strategy in detail to help investors understand the strategy and its use.
Traders can use it through online brokers and make the best of their services for successful trading. Although, traders have to be careful while choosing their broker and instrument for trade.