When done properly, momentum trading can produce very significant returns in a relatively short period of time.
Momentum trading is identifying, and holding, a fast rising (or falling) stock for a period of time - be in days, weeks, or months. In momentum trading, you are looking for stocks that are trending. Momentum traders use technical analysis to identify stocks that show the characteristics of either an upward or downward trend (to short). Trends can be either short, medium, or long term. Generally, in momentum trading, investors don't enter a trade unless a stock has already started to trend, preferring instead to buy into established trends. However, care is taken not to enter a trend too late, otherwise you will make very little, and could even lose money.
Of course, a stock rarely moves uniformly up or down, even in a trend. It tends to make smaller upward and downward movements within the overall trend. But a stock can also suddenly go down, and the momentum of movement (up or down) can also fizzle out.
Trading in momentum shares is not a 'buy and hold' strategy. Momentum shares are not identified using fundamental analysis, which seeks to measure a stock's intrinsic value. Momentum investors look at a stock's price, and the volume traded, to see whether a trend is occurring, and its' direction. These large movements in the market are often driven by large institutional investors buying or selling off stocks. A momentum trader will buy into a trending stock either right at the start of the trend, or early in the life of the trend. They will exit the trade preferably before the trend reverses - they are not looking to ride out a reversal like a value investor might.
In momentum trading, entry and exit points are often determined beforehand, at least in some momentum systems that use momentum trading within the context of larger cycles (and which have a very high success rate). Momentum traders tend to use the moving average as an exit signal. Taking a short-term average of about 5 days, and a longer-term average of 20 days, when the short-term average crosses below the longer-term average, that is a signal to sell as it usually means the stock is dropping. Different momentum traders use different periods of time to measure the moving average, but that is one possible setup.
Momentum traders might look for potential momentum stocks in the Wall Street Journal's NYSE Biggest Percentage Gainers list, in popular trading chat rooms (for which stocks are generating a lot of buzz), trading alerts (because those stocks may have significant volume traded that day), as well as listening to the news to see which companies are releasing news.
When the market opens, those stocks are watched in relation to the market, to see if they are traded more quickly, with more volume, than the rest of the market. Technical analysis is used, particularly the momentum line, and watching the level 2 screen shows the level of interest in the stock. Of course, there is an easier way.
What Can Go Wrong With Momentum Trading?
Trading is not an exact science, and things can go wrong. Whether it's due to lack of experience, emotions driving your actions, lack of knowledge, lack of mastery, or poor advice, the types of things that can go wrong in the momentum trading system are:
* poor to average stock selection
* you stayed too long, or not long enough, in a trade
* you entered or exited the trade at the wrong time
* poor stop placement
* you had too many stocks and your capital was thus too diversified to see any significant net gains
The most successful momentum traders use a system, and stick to it. It helps eliminate the interference your emotions can generate when a stock is performing well (greed) or badly.
References:
1. istockanalyst.com/article/viewarticle/articleid/3661191
2. investopedia.com/articles/trading/02/090302.asp
Showing posts with label Momentum. Show all posts
Showing posts with label Momentum. Show all posts
Friday, February 18, 2011
Monday, February 14, 2011
Momentum and liquidity are still key
Published February 14, 2011
By R SIVANITHY
SENIOR CORRESPONDENT
IT IS a fact of life that when momentum shifts and liquidity drains from a market, no amount of talk about valuations still being cheap or earnings still being compelling, or fundamentals being unchanged, will get people to buy. Ah, for the good old days of 2009 and 2010 when such talk did in fact have its intended effect.
Things were a lot easier back then - all analysts and economists had to do was draw more-or-less straight-line projections on the charts, pick reasonable-sounding target prices (though many were not that reasonable, it has to be said), point to China as the holy grail of economic growth and leave momentum and liquidity to do the rest.
To be honest, there was plenty of justification for taking that easy route - the region was enjoying double-digit growth, liquidity was plentiful and interest rates were low.
Furthermore, the investment banks who brought about 2008's financial crisis were handed billions in US taxpayers' money to play with, so all were well-flushed with cash to pump into equities.
There needn't have been any fear of a crash thanks to explicit guarantees from the US Federal Reserve about billions more in rescue money, so all an international investor had to do was avoid buying Europe while riding the Asian momentum.
Little wonder then that 2010 was dubbed as the year in which it was hard to lose money.
This year though, is shaping up to be a different proposition, as the economic picture gets complicated by rising inflation and interest rates, and in some countries like Australia, with the spectre of stagflation (or stagnant growth amid rising inflation).
Asian central banks, it is now believed, are too far behind the curve in their fight against inflation and are still displaying a reluctance to act swiftly. It is this lack of urgency which is said to be behind much of the sudden disenchantment with emerging Asia.
'The only effective anti-inflation strategy entails aggressive monetary tightening that takes policy rates into the restrictive zone,' wrote Morgan Stanley's Stephen Roach last week.
'The longer this is deferred, the more wrenching the ultimate policy adjustment and its consequences for growth and employment. With inflation - both headline and core - now on an accelerating path, Asian central banks cannot afford to slip too far behind the curve. . . Given the tenuous post-crisis climate, with uncertain demand prospects in the major markets of the developed world, Asia finds itself in a classic policy trap, dragging its feet on monetary tightening.'
(To be honest, the same might well be argued of the US, where interest rates have been zero for about two years and furious money printing has finally managed to put the brakes on a backsliding economy).
In all fairness to Asian central banks, some have been raising interest rates these past months, most notably China, India, Indonesia and Australia, so it isn't as if they're all dithering behind the curve.
And if you were to really think about it, investors are being asked to subscribe to an odd argument that if rates are now quickly raised Asia-wide, this would reassure investors that monetary authorities know what they're doing and therefore bring the bull market back to stocks.
Meanwhile, what of the US, the current safe haven for the world's funds? Thanks to the explicit guarantees from the Fed and a momentum shift of money out of emerging markets back West, the 'cannot-lose' mentality is stronger than ever on Wall Street where stocks have gone up in a straight line over the past six months.
And with the momentum/liquidity shift has come a story being circulated now that after two years of relentless monetary greasing, the recovery is underway (even if the numbers are still inconclusive).
As pointed out in last week's column, this means Asian markets that once used to function as an advance indicator of movements in the West are now clearly decoupled from the US and Europe. The decoupling will probably continue this week, although a short-lived, technical, short-covering bounce can reasonably be expected.
By R SIVANITHY
SENIOR CORRESPONDENT
IT IS a fact of life that when momentum shifts and liquidity drains from a market, no amount of talk about valuations still being cheap or earnings still being compelling, or fundamentals being unchanged, will get people to buy. Ah, for the good old days of 2009 and 2010 when such talk did in fact have its intended effect.
Things were a lot easier back then - all analysts and economists had to do was draw more-or-less straight-line projections on the charts, pick reasonable-sounding target prices (though many were not that reasonable, it has to be said), point to China as the holy grail of economic growth and leave momentum and liquidity to do the rest.
To be honest, there was plenty of justification for taking that easy route - the region was enjoying double-digit growth, liquidity was plentiful and interest rates were low.
Furthermore, the investment banks who brought about 2008's financial crisis were handed billions in US taxpayers' money to play with, so all were well-flushed with cash to pump into equities.
There needn't have been any fear of a crash thanks to explicit guarantees from the US Federal Reserve about billions more in rescue money, so all an international investor had to do was avoid buying Europe while riding the Asian momentum.
Little wonder then that 2010 was dubbed as the year in which it was hard to lose money.
This year though, is shaping up to be a different proposition, as the economic picture gets complicated by rising inflation and interest rates, and in some countries like Australia, with the spectre of stagflation (or stagnant growth amid rising inflation).
Asian central banks, it is now believed, are too far behind the curve in their fight against inflation and are still displaying a reluctance to act swiftly. It is this lack of urgency which is said to be behind much of the sudden disenchantment with emerging Asia.
'The only effective anti-inflation strategy entails aggressive monetary tightening that takes policy rates into the restrictive zone,' wrote Morgan Stanley's Stephen Roach last week.
'The longer this is deferred, the more wrenching the ultimate policy adjustment and its consequences for growth and employment. With inflation - both headline and core - now on an accelerating path, Asian central banks cannot afford to slip too far behind the curve. . . Given the tenuous post-crisis climate, with uncertain demand prospects in the major markets of the developed world, Asia finds itself in a classic policy trap, dragging its feet on monetary tightening.'
(To be honest, the same might well be argued of the US, where interest rates have been zero for about two years and furious money printing has finally managed to put the brakes on a backsliding economy).
In all fairness to Asian central banks, some have been raising interest rates these past months, most notably China, India, Indonesia and Australia, so it isn't as if they're all dithering behind the curve.
And if you were to really think about it, investors are being asked to subscribe to an odd argument that if rates are now quickly raised Asia-wide, this would reassure investors that monetary authorities know what they're doing and therefore bring the bull market back to stocks.
Meanwhile, what of the US, the current safe haven for the world's funds? Thanks to the explicit guarantees from the Fed and a momentum shift of money out of emerging markets back West, the 'cannot-lose' mentality is stronger than ever on Wall Street where stocks have gone up in a straight line over the past six months.
And with the momentum/liquidity shift has come a story being circulated now that after two years of relentless monetary greasing, the recovery is underway (even if the numbers are still inconclusive).
As pointed out in last week's column, this means Asian markets that once used to function as an advance indicator of movements in the West are now clearly decoupled from the US and Europe. The decoupling will probably continue this week, although a short-lived, technical, short-covering bounce can reasonably be expected.
Subscribe to:
Posts (Atom)