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Momentum Trading: The Things You Should Learn

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Momentum trading using an Ideal Trading Platform is one of the more advanced trading strategy used in the markets, going by FXempire Forex Review. At first, it may look like a hasty reaction to the volatile market.

Let’s break this strategy down and see if momentum trading is the strategy for you.

History

Richard Driehaus, though not the first investor to use momentum trading, managed to adapt the practice and turn it into something very profitable.

According to Driehaus, you could earn more by “buying high and selling higher.” He preferred that philosophy to the old adage of buying underpriced stocks and waiting for the market to appreciate its value.

In other words, you must sell the loser and let the winners ride. You must reinvest the money from the losers in other potentially profitable stocks. Many of the tactics that Driehaus used back then became the basics of the modern day momentum trading strategy.

Primary Principle

When you are a momentum investor, you try to take advantage of the market volatility. You must take short-term positions in stocks that are going up. Then, you sell them as soon as you see any sign of them declining. Lastly, you move your capital to a new, more profitable position.

Also, if you are a momentum investor, you try to take advantage of investor herding. You lead the pack inside, and then you’ll be the first one to take the money and get out.

Benefits

You stand to win a lot of benefits if you choose momentum investing as your strategy.

High profits in a short time

This is the most attractive feature that momentum trading sports. There are so many lucrative earnings that you can make.

Using market volatility to your advantage

If you are a momentum investor, you first goal is to use market volatility to your advantage. You capitalize on market trends. You try to search for and invest in stocks on their way up, and then you sell them before their price starts to retreat.

Using the market’s emotion to your advantage

Some market experts claim that the idea behind momentum trading is to chase performance. Momentum traders do that in a very methodical way with specific buying and selling points. Instead of getting emotional to stock prices like others, momentum investors aim to take advantage of market movements caused by emotional investors.

Risks

Like any other strategies, momentum trading also sports inherent risks and drawbacks you should be aware of.

High turnover

When we talk about high turnover, we talk about the potentially high fees you have to shoulder. This could add up and become too expensive for your taste.

Time consuming

Being a momentum investor means that you’ll spend most of your day monitoring market movements. You must do this hourly. This is because you deal with stocks with consecutive peaks and valleys.

Market sensitive

Momentum trading is best suited to use during a bull market since investors herd a lot more. Meanwhile, there’s an increase caution among investors during a bear market, which makes it difficult perform an effective momentum trading strategy.

Conclusion

Momentum trading can be used to earn large amounts of money. It is a legitimate technique used by many experienced and professional traders. However, you have to remember that it may not be for you, since it requires advanced skills and extreme risk management. Assess yourself first before trying to employ this technique.

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