With many methods and techniques on trading, it can get quite confusing for some traders just what may come it more effective and successful. The different methods aim to work with a trader’s own characteristics and behavior. It all depends on where a trader may feel comfortable and at ease with. Some traders may go with momentum trading while some may not.

What Is Momentum Trading?

Momentum trading is a type of trading characterized by focusing on stocks that are moving in one direction and in high volume. In this type of trading, traders usually get hold of a position for a few minutes to as long as the entire day, depending on how the stock moves and if it stays in the same direction. Momentum traders usually target stocks that are generating the current buzz in the news or in the market. He then moves to further analyze whether that stock continues to move in the same direction and keeps track of the volume of trading.

Momentum Trading Advantages

The advantages of momentum trading is that traders may be able to take some low risk and high reward positions, given that they know when to make the timed moves. Getting positions when the stock is still going into one direction can make them a bit more predictable up to a certain point. Going with the trend can be a good thing as long as the trader is able to make the right timing.

Momentum Trading Disadvantages

There can also be risks involved in momentum trading, just like any other method. There can be instances where the trader may be entering a position too late or too early. It can also be quite risky for a momentum trader to keep positions overnight. There are factors that may work even after the markets close that might affect a stock. This can change the patterns the next day and put the momentum trader on the losing end.