Momentum Trading:

Momentum trading seems to have many followers and equally many skeptics and cynics but we must first define exactly what momentum trading is and its advantages and disadvantages in order to form an educated opinion.

Momentum trading merely says every year there are a small number of stocks that go on to gain 500% - 1000%+ moves in the stock market. This can easily be seen by going to one of the many free stock screeners and typing in the parameter that displays stocks that have gained at least 500% over the year. Depending on the state of the overall stock market will depend how many stocks show up in this search. Even during the worse bear market I can recall (2000 –2001) there are still dozens of small cap, unknown stocks, and going on to make 500%+ moves.

Let’s go right back to some good old common sense. Let’s say every year there are 30 stocks that go onto make a 700% move in the stock market. What if we can jump on these stocks when they have put in a 400% move for the year? So to jump on board a momentum stock simply identify which stocks have already put in a sterling performance for the year. Buy into them and hope they keep powering on. Some will and some will not. Simply cut your losses quickly on the losers and ride the winners for as long as they keep heading in the right direction.

For many they will look at a stock, which has already gained 400%, and say it has gone too far. They would rather get in at the bottom and ride the stock from 0 to 400%. They have been taught buy “stock guru" to buy low and sell high. This sounds great but in practice it is a losing strategy. Why? You have no way of knowing which stocks the market will or will not fall in love with. All the fundamentals in the world cannot give you a better chance than flipping a coin. You can pick two equally great looking stocks. Both with fantastic earnings and prospects One will languish the other will go no to make stellar returns. Are you willing to take this risk?

Trying to pick a bottom is greed. You are not happy with making a 200,300%+ gain but you want more. You want it all. Greed and fear are the emotions that always have and always will destroy your stock market profits.

Another advantage with momentum trading and one severely overlooked is the speed at which profits are made. It’s all very well making an 800% return on a stock you made but it’s that great a return if it took six years to make it. Did you know the fastest movement in a trend is in the last quarter? You do now. Trends start slowly and gather momentum as they continue. A stock, which rises from Rs 10 to Rs 300, will see its fastest move from about Rs 70 onwards. The movement from Rs 70 to Rs 300 will be in about 1/10 of the time it took for the stock to go from Rs 10 to Rs 70. Think about this. It is much better to jump into the tale end of a large trend than catch the smaller, slower moving start of trends and this is exactly what momentum stock trading is all about.