What Is Momentum?
In trading strategy, momentum refers to the rate of change in the price of a financial asset over a given period of time.
The price change si often expressed as a change in the open-close data. E.g. the price of an asset at the opening of the week vs. closing price as the end of the week.
Momentum traders seek to profit from short-term price trends by buying assets that have been performing well and selling those that have been performing poorly.
Momentum traders typically use technical analysis to identify assets that are exhibiting strong positive or negative momentum. They may look at indicators such as moving averages, relative strength index (RSI), and MACD (moving average convergence divergence) to determine the current trend and potential entry and exit points.
One common strategy used by momentum traders is to buy assets that have recently experienced a significant price increase, on the assumption that the upward trend will continue. This is known as a “breakout” strategy. Conversely, they may sell assets that have experienced a significant price decrease, on the assumption that the downward trend will continue.
It is important to note that momentum trading can be risky, as price trends can quickly reverse direction, leading to significant losses if a trader’s positions are not properly managed. It is therefore important for traders to have a well-defined strategy, strict risk management rules, and the discipline to stick to their plan even in the face of short-term fluctuations.