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Momentum Investing For Profits

Jul 8, 2008
Momentum investors always search for companies that are moving faster than the market. They buy stocks that are already on their way up with the belief that it will continue to go higher.

Momentum investors do not care about the fundamentals of a company as long as the price continues to go higher. They believe substantial returns can be realized if they find, buy and hold onto those issues while price continues to go up.

These kinds of investors would likely use technical analysis to forecast whether a stock will continue to rise or not. However, one can't just know with a 100% certainty when the rise may be over.

A trader participating in momentum investing will take a long position in an asset, which has shown an upward trending price, or short sell a security that has been in a downtrend. In practice, momentum investing is nothing more than buying stocks that have high returns and selling those that have poor returns. If everybody is thinking that way, rising stocks will keep rising and falling stocks will keep falling. However, this cannot last forever.

In order to earn money from momentum stocks, it is very important to buy and sell at the right time. There are a handful of key factors in successful momentum trading.

One of these factors is the point at which one is willing to enter a trade. Setting specific entry points is important in order to catch the momentum once it has begun. The key to successful trading on momentum is not playing around within the stocks' recent high and low price range.

Setting an entry point above the stock's recent high price or below its recent low price helps one catch bigger, more significant momentum in trades.

By setting an entry point above the stock's most recent high price, one will only begin to trade when the momentum is already going in the direction predicted. In this case, the price is going up.

If, however, there is initial downward momentum, the investor's trade won't trigger, preserving his/her capital for other trades. Setting proper entry points is therefore essential to the success in momentum trading.

In momentum stock, an investor needs to minimize the risk of losing trades by pre-designating a price point at which he/she chooses to exit or stop a trade with a minimal loss.

The use of stop points helps to limit the magnitude of a losing trade, thus, is crucial to the investors' capital preservation. By setting stop losses, investors allow a small movement in price going against them, but cap the amount of negative movement they are willing to absorb. By exiting a trade that is going against them with only a small loss, they are able to preserve their trading capital for future trades.

Stop points also help eliminate emotional trading. As investor, one needs to guard against staying in a trade too long while hoping for a turnaround. Set correctly, a stop loss will allow for small fluctuations in price but protects the investors from more powerful momentum going against them.

There are times when the stock's momentum carries the price beyond the targeted exit price. When this happens, trailing stops is a useful tool, allowing the investor to let profits run while cutting losses at the same time.
About the Author
Mark Crisp is the momentum stock trader. Finding the hot stocks that are going up right now and will continue to go up in the future. Sign up for my free e-course at: http://www.stressfreetrading.com
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