What is Momentum investment – momentum investing in stocks – momentum investment strategy

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Hey guys, Welcome to another article of ViralMaxx. In this article, we’re gonna talk about something very different and that is known as momentum investing. Now I’m not sure if you guys have heard of what momentum investing is it is. Slightly different from the regular investing strategies. But don’t worry we’re gonna clear that doubt as well today.

This is only for educational purposes. So you understand when someone talks about momentum investing. You’ll be like yes I know this because I read this on the ViralMaxx so I have exactly a full idea of what this is.

POINTS TAKEAWAYS

  • Momentum investing is a trading strategy in which investors buy securities that are rising and sell them when they look to have peaked.
  • The goal is to work with volatility by finding buying opportunities in short-term uptrends and then sell when the securities start to lose momentum.
  • Then, the investor takes the cash and looks for the next short-term uptrend, or buying opportunity, and repeats the process.
  • Skilled traders understand when to enter into a position, how long to hold it for, and when to exit; they can also react to short-term, news-driven spikes or selloffs.
  • Skilled traders understand when to enter into a position, how long to hold it for, and when to exit; they can also react to short-term, news-driven spikes or selloffs.
  • Risks of momentum trading include moving into a position too early, closing out too late, and getting distracted, and missing key trends and technical deviations.

Although he was not the first to use the strategy, fund president and manager Richard Driehaus is frequently credited as being the father of excellence investing.

WHAT IS MOMENTUM INVESTING

So guys now we know for a traditional element right? When you’re investing in something. we always look at it okay you need to buy low and sell it when it’s high so you make that profit right that is what normal investing is. But this is where momentum investing is slightly different

so momentum investing as the name suggests basically depends on the momentum of a stock price. It is not encouraged by buying low and selling high or it is not discouraged by anything else. Basically what this idea means what momentum investing is that if a stock is in upward momentum. If the stock price is rising slowly and you feel that it is in upward momentum. Because maybe it is trending the commodity cycle has just kicked in so maybe see say.

For example, all agriculture stocks will go up so the momentum of those stocks will be going Upwards. When that happens right when you understand that a momentum of a particular stock is towards the upward directions. That is when investors come in and buy these momentum stocks only until the momentum lasts. Right, so it’s considered like trending stocks right. So if there’s a momentum in the stocks for an upward movement you buy and you sell once the momentum is over again you have no idea when the momentum might get over but you predict that okay this entire industry.

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For example, recently we saw that our entire metal industry was doing well  so the momentum of the metal industry stocks were on an upward journey. Now it has died down a little bit now.

The metal stocks are not so much in the limelight. But whoever played with that momentum of metal from the start of the metal journey to the end of the metal momentum. They would have made Money.

The same thing happened last year. If you remember when covert happened pharma stocks were in momentum. All the people who played on the pharma stocks bought them and sold them towards the momentum they made money. So basically, no one’s looking at any kind of fundamentals here. There is no fundamental analysis there is not much technical analysis the most analysis that they do is whether this momentum of this industry is currently trending or not. If it is they buy it and then it goes up in an upward direction and then sells it at a higher price.

Now that is one but there’s another way to do this as well the other way is reverse. Assume there’s some kind of bad news government change some new GST tax slabs. And you know some type of industry maybe say. For example, paper industry came with a higher tax lab you and I both know that the entire paper industry will start declining on a downward trend so what a lot of people do they even catch negative momentums right so they actually sell short sell the stocks okay when it’s going down constantly they sell it first and then they buy it at a lower price thus making the profit there so momentum does not always have to be up okay it can also be down it can be upwards and it can be downwards as well now

Precepts of Momentum Investing

Momentum investing Seeks to benefit from market volatility. By taking short-term positions in stocks moving up and selling them as soon as they show signs of going down. The investor then moves the capital to new positions. In cases like this, the market volatility is like waves in the ocean, and a momentum the investor is sailing up the crest of one. Only to jump to the next wave before the first wave crashes down again. A momentum investor Looks to make the most of investor herding by leading the pack in and being the first person to take the money and run.

Elements of Momentum Investing

Trading momentum markets need complex risk management principles to address volatility, overcrowding and concealed traps that reduce profits. Market players frequently ignore these rules, blinded by an overpowering fear. They will miss the rally or selloff while everyone else novels windfall profits. The rules can be broken down into five components:

  • Selection, or what equities you choose
  • Risk revolve around timing in opening and closing the trades
  • Entry timing means getting into the trade early
  • Position management couples wide spreads and your holding period
  • Exit points require consistent charting

To increase the likelihood of choosing an investment. That is Liquid and volatile, pick individual securities. Instead of mutual funds or ETFs, and make sure they have an average trading volume of at least 5 million shares per day.

HOW TO BUILD YOUR OWN MOMENTUM INVESTING STRATEGY?

Let’s see how you can build a momentum strategy in the next segment. Now in this segment let’s figure out how you can build your own momentum strategy. Now let’s look at this there are a lot of ways to build your own momentum strategy. But we’re going to refer to a book. Which was written by Jack Vogel and Wesley Gray. It was known as quantitative momentum. Let me tell you some of the interesting things, that they figure out in this book that might help you build your momentum strategy. In this study that in the whole book that they gave out there were three types of momentum stocks or three types of momentum. Not stocks but three types of momentum and what were they?

Short-Term Momentum

Which was basically returns analyzed for a particular stock over a period of one month.

Long-Term Momentum

Long term returns analyzed over the period of five years or sixty months.

Medium Term Momentum

Medium term returns analyzed over a period of six to 12 months.