What is momentum trading?

Core points

● momentum trading is designed to "buy higher, sell higher" and is designed to take advantage of the price trend of financial assets.

Richard Driehaus, a famous technology trader at ●, is recognized as the father of momentum trading.

● momentum trading strategy is more effective in the bull market.

Detailed explanation of concept

Momentum trading is a strategy to buy and sell financial assets by analyzing recent price trends.

Momentum traders seek to take advantage of the upward or downward trend of stock prices. When technical indicators suggest that the stock is entering a strong upward trend, then the trader will buy the stock; when the index implies that the stock is entering a sharp downward trend, the trader may choose to short the stock.

In short, momentum trading is homeopathic trading. Momentum trading is based on the view that if there is enough force behind the current price trend, it will continue to move in the same direction. When an asset reaches a higher price, it usually attracts more investors' attention, thus pushing up the market price. Prices rise until the seller begins to enter the market, and once the seller's power gradually exceeds that of the buyer, momentum weakens, and the trend may be reversed.

The history of momentum trading

As early as the Victorian era, researchers have found that there is a sustained kinetic effect in the stock market. Richard Derry House (Richard Driehaus), often regarded by many as the father of momentum trading, used momentum trading strategies for the first time in his funds and rose to fame by promoting momentum trading strategies.

Richard Derrihaus believes that the momentum trading strategy of "buy high, sell higher" can be more profitable than buying low-priced stocks and waiting for the market to revalue them. After 2000, with the rapid development of computers and networks, the computer-driven momentum trading model can apply more momentum trading factors to analyze the real market.

The disadvantages of momentum trading

If applied properly, momentum trading helps trend traders capture short-term stock price trends and make a profit. However, like any other form of trading, momentum trading carries some risks.

Momentum trading is highly time-sensitive. Traders must monitor the market regularly because prices may fluctuate many times in a day. Once the position enters a little later or earlier, the return on investment may change from positive to negative.

Momentum trading is better suited to a bull market where herding and price bubbles are quite common. However, in a volatile bear market, investors may be cautious, which reduces the profit margin of momentum trading.