Momentum Trading Definition | Day Trading Terminology For Beginners

Momentum trading is a style of trading that is focused on trading stocks that have a high probability of making a big percentage move in a short period of time. The style of trading is ideal for day traders, as it offers the potential to make huge returns in just hours or days. It is a style of investing that is based on taking short-term positions in stocks going up and selling them as soon as they show signs of the trend ending. It is a great strategy to short sell stocks, meaning betting on a stock to go down.

Why Use Momentum Trading? 

Day trading and swing trading momentum stocks have the potential to offer huge percentage returns in a short period of time. Successful momentum trading can yield 5%,10%, and sometimes even larger returns on day trades or swing trades. The strategy focusing on trading stocks with high volatility, strong liquidity, and often with a strong catalyst.   One needs strong risk management skills to successfully trade momentum stocks. Occasionally stocks will not move in the direction you anticipate, and you will be forced to take a small loss. If you do not have a stop loss on your positions in momentum stocks, you risk taking a large loss of your capital due to the high volatility. We teach the low-risk, high-reward methods of trading momentum stocks in our 60-day trading boot camp.   

Momentum Trading vs Long-Term Investing

Long term investing involves holding positions for months or years based on fundamental analysis. Typically you avoid high volatility stocks in this style of trading. There is less risk, but there is also less reward. Long term investors will often buy and hold blue chip stocks like Apple, Google, etc in their IRA account.  Momentum stocks have much higher volatility, which allows the trader the potential to make much greater returns in a shorter period of time. It relies primarily on technical analysis, and positions are entered and exited very quickly. If you don’t have quick decision making, swing trading is a better style of momentum trading for you. You will hold your positions longer, and there is less micromanaging.

Holding Period

Periods for holding momentum stocks can be as fast as 2 minutes, to as long as 1-2 weeks. It depends on whether you are taking a day trade or a swing trade. We are trying to capitalize on strong, short term trends in the markets. This style of trading is the most efficient use of capital since you are constantly rotating your money into the stocks that making big percentage room. This is why it has the potential to be a significantly more profitable style of trading than long term investing.

Free Trading Assessment

If you are wondering how to get started trading stocks,  fill out our free trader assessment here and we will go through all of your goals in detail. Don’t procrastinate on your success. Make 2019 the year where hit and exceed all of your trading goals.]]>