Quantitative strategies do not always work, but one of the interesting findings in the field of trading is the involvement of momentum in models. This remains indefinite as it continues to pose a question of whether this structure will persist or will eventually be obsolete. However, the recent trend observed back in 2003 opened a discourse about momentum trading strategies and their potential. In line, other narratives, including momentum trading risks, its function in selecting stocks, and momentum’s connection to other fundamental variables, were then brought into the discussion.
Momentum day trading focuses on capturing profitable securities within a 12-month time frame and selling those that may lead to mounting losses. While there may be several methodologies and day trading strategies for beginners capable of determining the momentum of a particular security, placing a long position on high swings and short on low are two principles that serve as the foundation of momentum trading.
Momentum Trading Indicators
Many theories are proposing the viability of momentum day trading in-stock selection. Moreover, proponents have laid out parameters and tools on how to measure such.
- RELATIVE STRENGTH – This sets a parameter of 1-100, observing a stock’s relative price strength, all while comparing it to other stocks. Relative strength can be observed using a flexible time frame, which ranges from three months up to one year.
- INDUSTRY RELATIVE STRENGTH – This system identifies industries with strong price performance. It analyzes macrocosmic fields such as the industry or the sector in which a specific stock is performing or those that have direct impact to the stocks.
- TWELVE MONTH MINUS ONE MONTH MOMENTUM – This examines a stock’s return in the last 12 months without including the present month.
Momentum Trading Risks
Similar to other trading structure, momentum trading has its setbacks and disadvantages. There are identified risks associated with momentum trading, and below are some of the setbacks that traders might want to be mindful of.
- TURNOVER – Momentum day trading projects an intensive level of turnover, which entails several implications. One example of this is the large volume of trading fees and charges.
- TAXES – Momentum trading strategies are tax-inefficient, which makes ETF an ideal resort.
- IMPLEMENTATION RISK – It is generally acknowledged in the field of trading that the more placed positions, the higher the risk. This, together with a high amount of turnover, makes momentum trading a risky venture.
- MARKET TRANSITIONS – Momentum day trading is not ideal just when the market swings from one direction to another. Sharp market reversals dismiss momentum and make momentum struggle in big market changes and transitions.
- MOMENTUM CRASHES – Drop-in momentum stocks indicate heavy losses as attested by big market crashes recorded from financial history.
Momentum day trading strategies came to be one of the most profitable trading structures. This is only true if one knows how to utilize the strategy to his or her advantages.