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5 Beginner Tips to Use Momentum Trading Strategies

Those, who have ever used momentum trading strategies, are well-aware of all that risk involved. At the same time, they let traders quickly and accurately identify specific sectors that may have potential profit.

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Momentum trading followers do their best to use the slightest chance and make the most of both upward and downward trends when trading ETF and stocks. As an old trading saying says, “a trend is your friend”. Riding a trend is definitely the thing we all look for. Momentum trading can be the driving force that keeps those trends moving in the same direction.

Today, we are going to show some of the simplest ways to use momentum trading strategies without specific skills or background.

Momentum Trading Tip #1 - Track the Highs

When using this particular technique, you are supposed to look for stocks and ETFs ’ prices that are moving upwards. You need to spot a trend that moves the same way day by day and week after week. In some cases, it may last up to several months or even longer without any interruption.

While some people are afraid of entering the market that is making new highs, as a momentum trader, you need to look for them. This is where additional confirmations and pieces of evidence of the trend or price-making new highs are necessary.

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Momentum Trading Tip #2 – Keep an Eye on Volatility

Every trade must be carried out with a higher volatility degree when it comes to implementing momentum trading strategies. The main idea of the concept is to make a profit from the increasing market volatility. If you fail to time or schedule your short and long orders correctly, it may inevitably result in big losses. For this reason, it is very important to utilize different risk management tools and stop-loss orders in particular.

Momentum Trading Tip #3 – Seek Price Trends

Traders may opt for various methods of spotting the trend. If you generally trade ETFs and stocks, you may use the asset percentage traded during the period of 10% from a 52-week high. Another way is to look at how that percentage has changed over the last 12-24 weeks. Both methods are pretty sensitive and accurate in terms of identifying recent price moves.

Some traders rely on shorter time frames. They use short periods to look for price trends and changing components. For example, they apply a 1-4 week change instead of the 12 or 24 weeks we have mentioned earlier. However, it may result in getting out of a particular asset you trade.

Momentum Trading Tip #4 – identify the Best Sectors

If you want to become a successful momentum trader, you need to learn some proven ways to identify the best sectors as fast as possible. It is not only about speed but accuracy. This is where you may find the following steps quite helpful:

  1. Identify the trading asset you are interested in. It can be either stocks or ETFs.
  2. The next stage is to calculate the asset volume traded near the yearly highs.
  3. Divide them into the “low” and “high” category to see, which one is doing well.
  4. Work out a market entry strategy. Traders may wait for a pullback if the asset is likely to keep strength for a short period making it possible for market participants to purchase the asset when it weakens.
  5. Work out the market exit strategy. Before entering a trade, you need to clarify at what point you are going to make a profit and what conditions will make you exit the market with a loss.

The Risks Involved in Momentum Trading

You should clearly understand that momentum trading comes with a big deal of risk. Traders generally make decisions based on recent buying data.  No one will ever guarantee that the buying pressure will push the price higher. There is always a chance for new buyers to be overpowered by profits on already existing positions, which will inevitably force the price to move down. 

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.