This is what all traders/investors want from the stock market- to grow rich as fast as possible. Even I entered the market with the same motive.But everyone cannot do this.
Momentum investing strategy can help you do this but you need to know yourself. Is it made for you?
It is the strategy where you as an investor need to identify a trend and invest in the trend in expectation that trend will persist. It’s the most primitive type of investment strategy.
So how will you identify a trend?
This will require sophisticated technical analysis to identify and conclude any trend that may be upward or downward. This is mostly performed by a professional investor who has excelled in technical analysis and is good in entry-exit timings. These include fund managers, Institutional investors, mutual fund managers etc.
This investment strategy cannot be incorporated in-line with value investing or dividend strategies. It stands alone and used for a short or intermediate term only.
Short term may last up to 1 month while the intermediate term may last from 6 months to 12 months.
It all depends on the rate of change of price of stocks. Traders search for stocks that have a high rate of change with large volume, this helps to describe the trend in the market.
If you are willing to follow momentum investing strategy, the thumb rule you have to follow is to jump in the market when the trend starts upward and jump out when the trend ends. In this manner, investor books their profit with rising trend and short sell when the trend falls.
Investors following this strategy may stay with the trend as long as the trend persist. They need to estimate the timing of trend reversal and make their exit. This involves high-end technical analysis which includes a trendline, moving average graphs. With the increasing trend line, traders invest and as trend line falls traders sell reflecting the trend in a respective manner.
One need to get his hands on candlestick chart with proper knowledge of convergence and divergence. Trend change in the market usually comes with the news. When market reacts to any news the price change take place leading to upward or downward trend. This investment strategy is converse with value investing.
A value trader finds for a value stock and invests at a low price and sell at high which contradicts the rule for momentum investor who buys a stock at a high price and sell at higher price.
Momentum investor has only concern for the trend in the market which decides their entry-exit timings irrespective of return or fundamental and past history of the company.
Are you the right person? Who should use this?
As a trader, if momentum investing strategy is your choice then you need to be expert in technical analysis. It also requires a quick decision and continuous follow-up of charts.
If your investment plan is for short term then this may help you earn great returns in short period of time. Usually, professional traders perform such strategies as a beginner it is not advised. It also requires dedicated time, if you cannot afford time you cannot deal with this strategy.
- Good for those who perform short-term investment.
- Need full-time dedication for stock and trend analysis
- Cannot be mixed with value investing.
- Follow the rule of buy high and sell higher
- Technical analysis and chart readings are a key skill one need to excel in.
You can only enter with this strategy if you have sufficient time to monitor and keep track of market trend. If you miss the timing you lose the game. Urge to grow your wealth fast has not helped anyone, even with this strategy you need to give some time which may be comparatively low and have a hand on technical analysis.
All you need to remember is with increasing potential of growth risk potential also increases. All you need to make is a logical and conscious step. It is advised for beginners not to start trading with this strategy rather first have an expertise in diagnosing trends and reading charts.