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Momentum Trading: An Art Form Performed Security By Security
by Matt kaldor
For most people, momentum trading is used to describe the manner in which short term trading decisions are made in relation to significant price changes in securities. Using technical analysis and the use of technical indicators, momentum traders look to get ahead of the next upcoming trend or determine the strength of the current price trend in place. In short, momentum trading focuses on identifying the trading opportunities that arise from the market changing from one direction to another. Technical analysts seeking short term opportunities in securities that they have not traded before should look at how they have reacted to past technical indicators before rushing in to trading conclusions.
Since technical analysis uses past price history to determine future price trends, it is inherently fallible because past price history has no bearing on future price. However, since most stocks are traded by the same clientele, each security has a trading personality and identifiable short term patterns that can be traded. Knowledge of the individual stocks as well as the identifying changes in the overall market is necessary for forecasting the creation or extension of any price trend. The use of technical indicators, overlays, and other technical tools should be used in the context of the stock being analyzed. However only by using technical tools in relation to knowledge about the stock's past trading patterns can decent predictions be made.
The key analysis in any momentum or swing trade is the identification of entry points and exiting positions. Finding an entry at the lowest cost and exiting at a point just before the next inflection point results in the greatest profit potential. Determining these exit and exit points is not only a return maximization exercise but also a risk mitigation one as well. This is because no one ever lost money getting in late and getting out too early, although in some instance they may have reduced their profit potential. It is the additional risk of trying to time entries and exits perfectly that does not provide a commensurate return and will eventually lead to losses. The only way to mitigate these losses is to make predictions in the context of experience with a particular security and then by not overreaching in terms of entry and exits.
Other analytical factors as price, volume, support and resistance, and chart patterns are only valuable in the context of what has happened before in that particular stock, index , or ETF. Indicating support and resistance only has value if there is some indication that they have had some past significance or that traders in that security have made buy and sell decisions on the basis of price. Certain stocks, such as the QQQQ ETF, are so liquid that it takes buyers and sellers some time to find significant bottoms and tops. For this reason it is not prudent to set profit targets or make decisions about stop losses and other risk mitigation strategies without having some knowledge about how the traders in that security have reacted to similar events in the past. For example, high beta stocks are expected to increase and decrease at a greater rate than the overall market. It would be a mistake to trade a high beta stock bullishly if the analysis for the overall market in the short term is bearish.
Although a simplified example, many traders will make assumptions about securities they have not traded before due to their overall experience trading other stocks. This is a recipe for disaster especially when momentum trading. It is recommendation that although technical indicators may help one filter market opportunities, one should take a good look at past events to see how a particular stock has reacted. A more conservative approach is to paper trade a new stock until one gets the feel of how the security reacts to market cycles and its clientele reacts to changes in pricing.
About the Author
Matt Kaldor is a senior content writer with Better Trades (bettertrades.tv), the nation's No. 1 stock market education company.
Taio Cruz - Little Lion Man (Mumford & Sons Cover) - Live lounge
Taio Cruz came into the live lounge today and did a wicked cover of 'Little Lion Man' originally by Mumford & Sons
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