Momentum trading is common trade strategy Where participants seek to profit when an asset rises or falls over an extended period.
A good example of this happened during the Covid-19 pandemic with high stocks Where the Federal Reserve cut interest rates Quantitative tightening policy was adopted.
In this article, we will explain how momentum trading works and some of the best tips to use even if you are a newbie to the world of trading.
What is momentum trading?
Momentum trading is an approach in which the trader determines the financial Origin This is it Having momentum and then moving with it.
If the stock is moving up, the trader can take a long trade and profit as the price continues to rise. On the other hand, if the stock falls, the trader will sell it and take advantage of it when the price slips.
Momentum Trading Similar to follow the trend In terms of a trader hoping to profit when there is an existing trade. So here are some of the best trading strategies to use in momentum trading.
Best Momentum Strategies for Beginners
Multi time frame analysis
The Multi time frame analysis It is an important concept in the financial market. It is a process in which a trader performs an analysis on a financial asset based on different time frames. In most cases, we usually We recommend look at me Three striped time frames.
As such, if you are a 1 minute trader, you can start by looking at a 10 minute chart followed by a 5 minute chart and a 1 minute chart.
Similarly, if you are a swing trader, you can take a look at the hourly chart, the 30 minute chart, followed by the 15 minute chart.
The benefit of performing a multi-timeframe analysis is that it will do so Help you identify the trend and support and resistance levels. Most importantly, it will help you identify places to place your stop loss and take profit.
Wait for the undo and install processes
As shown above, direction in the financial market It’s never a straight line. In most cases, financial assets often have some downside and monotheism When they have momentum. Therefore, as a trader, you should always work to identify these pullbacks to enter your trades.
there Several kinds of patterns Traders can use it To identify entry points during momentum trade.
For example, a chart can form a bullish flag or a pennant pattern. rising The flag occurs when the arrow joins the rectangle style while a The banner looks like a triangle pattern. In most cases, when these patterns occur, they usually have an extension bullish breakout.
Likewise, a bearish flag and pennant is usually accompanied by a bearish breakout. A good example of a bearish breakout is shown in the chart below.
Focus on the stimuli
Another important tip to remember when doing momentum trading is always Look at the triggers that can have an effect on an asset. Luckily, There are many stimuli It can have an impact on financial assets such as stocks and currencies.
In stocks, catalysts can be profitsmanagement changes, Mergers and AcquisitionsAnd the business events Like investor offers.
A good way to look at this is to use company calendars to predict which stocks will have momentum soon. For example, you can look at the file earnings calendar To find out which companies will publish their financial results.
If a company like Meta Platforms is expected to post earnings, you can expect it to have either bullish or bearish momentum.
Pre-market drivers and most active stocks
Another strategy that will help you with momentum trading is how to do it Select companies to trade. With thousands of stocks in the market, using these tools will help you Simplify the process. Websites such as Investing.com and Market Chameleon have sections dedicated to these sections.
First, you can look at the stocks that are most active. These are the companies that It has large sizes With them. As such, you can conduct your analysis of Find out why they have the momentum.
Second, you can look at the top gainers and losers to identify momentum stocks to trade. Third, you can look for stocks that reached 52-week highs and lows.
Always protect your trades
Another tip for momentum trading is Always protect your trades. All online exchanges and brokers have tools that enable one to protect their trades.
a stop loss It is a tool that automatically stops trades when it reaches a certain level. For example, if you execute a buy trade at $20 and set a stop loss at $18, the trade will be executed when it drops to that level.
a Profit takingOn the other hand, you will stop the trade automatically when you reach your profit target. on the other side, Trailing stop loss You will move with the trade and stop it when you incur a certain loss.
Having these stops will help you protect your account and avoid big losses.
Finally, you must Always use technical indicators When day trading using the momentum strategy. For example, you can use trend indicators such as moving averages, VWAPAnd the Bollinger Bands to follow the trend.
In this case, you should always buy when the asset is above the moving averages and continue to trade bearish when it is below the moving averages.
You can also focus on momentum indicators like RSI (RSI), Pushing forceAnd the MACD To know when to buy or sell a financial asset. All of these indicators should be Combined with chart pattern analysis.
Momentum is one of the most important concepts to know and include in your trading activities in the financial markets.
In this article, we have looked at some of the best momentum strategies for novice traders, however the insights we have provided are also valid for experienced traders.
Useful external resources
- Ten tips for creating momentum in your life in strategy