What is Momentum Trading?
Momentum trading is a strategy that seeks to capture gains by riding established price trends, buying assets that are rising and selling them before the trend reverses.
Momentum Trading Explained
Momentum traders believe that assets that are moving strongly in one direction will continue to do so long enough to capture profits. They use indicators like RSI, MACD, and rate of change to identify and confirm momentum. The key risk is entering too late, just as momentum fades. Risk management through stop losses is essential.
Real-World Example
A stock gaps up 8% on strong earnings and volume is 5x normal. A momentum trader buys immediately, riding the move up 3% more before selling. They use a trailing stop to protect gains if the momentum reverses.
Related Terms
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