Utilizing Momentum Trading
Utilizing Momentum Trading
Traders have numerous forms of trading strategies that they leverage off of on a consistent basis. The markets are made up of numerous traders all with a different idea and philosophy on which direction the markets are headed. It is important for the trader to understand that each trader has a different understanding on which direction the market is headed so that they can utilize their strategy to the best of their ability. The biggest opportunities come when the trader is buying into the market and the masses are selling. Conversely, another large opportunity is when the trader is selling and the masses are buying. This form of buying and selling can be assimilated to attempting to catch a falling knife while it’s dropping.
Trading in general can be assimilated to how an individual conducts their purchasing patterns throughout their ordinary life. There are traders/consumer who will continue to look for the best sale possible and are willing to forego opportunities to get the price they want. On the other had you might be the type of buyer/trader who is not a shopper and knows what they are looking for and grab it when the time is right which fits in with the idea of momentum trading.
If your idea of timing the market is similar to catching a falling knife and shopping for the appropriate/best sale and you are willing to forego other opportunities until you obtain the right price might be the best alternative trading style for you. Instead, you might be a buyer as opposed to a shopper and when you see what interests you most than trading momentum is more likely than not going to work for you.
Typically, momentum trading takes place when the price of a security picks up in one direction and the gradual increase in momentum continues to trend. Momentum can and be looking at as the rate of change over a specified period of time.
Technical trading plays a big role in the arsenal of a trader. It is very important that the trader understands how to leverage technical trading and can understand what their charts and graphs stand for. There are presently teens of technical indicators which evaluate momentum. Many of these indicators focus on measuring percentage change in price from one point in time to another. The general premise when utilizing technical analysis is that you are comparing the current price to another price y periods ago. With this form of information, you can utilize oscillators which is a specific index that fluctuates from one to one hundred.
Another method of utilizing momentum as a strategy which typically smooths the period in question is through leveraging a moving average. The tool which is best to accomplish smoothing the period in question is the Moving Average Convergence Divergence Index (MACD). The MACD was created by Gerald Appel and is the best and most efficient way to measure momentum.
In closing, utilizing momentum as a strategic tool for a trader can help benefit that trader immensely if utilized correctly. The trader needs to not only understand how momentum affects their trading style but can also leverage technical charts to get a leg up on the market when using this strategy.