When it comes to settling on a coherent trading strategy, none comes close in terms of apparent ease of execution like momentum trading. Momentum trading is where the trader looks to identify trends in price movements and waits to see those movements taking effect before opening complimentary positions to ‘ride the wave’, often relying on macroeconomic indicators and industry developed to predict when markets are likely to start moving. When trading CFDs, the benefits of momentum trading on margin can be significant, leading to vast profits as your positions move with the momentum of the markets.
Of course, while momentum trading might seem straightforward, easy to understand and low-risk, that’s never a guarantee, and there may well be problems facing the trader who approaches with such a mindset. Choosing the right positions takes time, and is usually a cross between understanding and interpreting the impact of corporate and economic announcements while analysing charts and previous price data.
Perfect Your Momentum Trading
As a trader employing a momentum trading strategy, it can be possible to take full advantage of heavy price movements through the relatively transparent shifting in price of certain assets. At the opening of the trading day, you will usually be able to get a feel for the sectors and companies that are performing well, and it just takes one positive corporate announcement to buoy that particular stock and the industry as a whole. By browsing the online forums, blogs and chat rooms, it quickly becomes apparent the stocks that everyone’s talking about – keep an eye on them, because chances are they’ll start to rise at some point over the coming trading day.
A good momentum trading strategy seeks to find the intersect between economic interpretation and effective analysis of trading data, identifying shares which appear to be preparing to break through their previous upper limits to reach new heights. You are looking primarily to identify stocks that have been performing well and are poised to break through, either positively or negatively, and you should create a shortlist of ‘watch’ stocks for the first part of your trading day.
Alongside that, you should aim to keep a constant eye on the financial media as the day wears on, and you should already be anticipating announcements that could have an effect on the price of the securities on your watch list. When the conditions are right and prices seem to be moving in one definite direction, it’s time to open your contract and wait for the position to unfold.
A Word Of Caution With Trading on Momentum
When trading on momentum, it’s always a good idea to set stop losses, to limit your liability and close out on bad calls before they take a stranglehold of over your trading account. Set stops somewhere between the previous high and low limits for capital preservation if you’re going long, and do likewise with a stop limit if you’re shorting – this is usually a good point to cut things off, and might just be the point of no return for a once promising security on that trading day.
Of course, momentum trading isn’t a strategy you can perfect in a matter of moments or even days – it takes time to practice and refine your approach, and even experienced traders are still learning lessons. But by giving yourself a strategic area in which to do further reading to start to build up your trading experience, it can be possible to relatively quickly start banking winning, profitable and above all consistent trades.