What is 'Momentum'

Momentum is the rate of acceleration of a security's price or volume. In technical analysis, momentum is considered an oscillator and is used to help identify trend lines.

In general, momentum refers to the force or speed of movement; it is usually defined as a rate. In the world of investments, momentum refers to the rate of change on price movements for a particular asset – that is, the speed at which the price is changing.

BREAKING DOWN 'Momentum'

Once a momentum trader sees acceleration in a stock's price, earnings or revenues, the trader will often take a long or short position in the stock in the hope that its momentum will continue in either an upward or downward direction. This strategy relies on short-term movements in a stock's price rather than fundamental value.

Momentum Examples

If a trader wants to use a momentum-based strategy, he takes a long position in a stock or asset that has been trending up. If the stock is trending down, he takes a short position. Instead of the traditional philosophy of trading – buy low, sell high – momentum investing seeks to sell low and buy lower, or buy high and sell higher. Instead of identifying the continuation or reversal pattern, momentum investors focus on the trend created by the most recent price break.

Think of it like the momentum of a train. When a train starts, it is accelerating, but it is moving slowly. In the middle of the trip, it stops accelerating, but it is traveling at a higher velocity. At the end of the trip, the train is decelerating as it begins to move slower. For the momentum investor, the best part of the train ride is in the middle, when the train is moving at its highest velocity.

Momentum investors like to chase performance. They attempt to achieve alpha returns by investing in stocks that are trending in one way or another. Stocks trending up are referred to as hot stocks. Some are hotter than others as measured by growth over a period of time. A stock that is trending down is cold.

Momentum Tools

Some tools for momentum investors help to define the trend, such as the trend line. A trend line is a line drawn from the high price to the low price, or vice versa, over a given time period. If the line is up, the trend is up and the momentum investor buys the stock. If the trend line is down, the trend is down and the momentum investor sells the stock. In this way, momentum investing is purely a technical indicator. Though the "momentum" can refer to fundamental measures of performance, such as revenue and earnings, it is most commonly used in reference to historical asset prices as a technical indicator.

RELATED TERMS
  1. Momentum Investing

    An investment strategy that aims to capitalize on the continuance ...
  2. Earnings Momentum

    When corporate earnings per share (EPS) growth is accelerating ...
  3. Trend Trading

    A trading strategy that attempts to capture gains through the ...
  4. Momentum Fund

    Investment funds that invest in companies based on current trends ...
  5. Trend

    The general direction of a market or of the price of an asset. ...
  6. Technical Analysis of Stocks and ...

    The academic study of historical chart patterns and trends of ...
Related Articles
  1. Financial Advisor

    3 Advantages of Momentum Investing

    Momentum investing, if performed professionally with a considerable amount of time invested, can offer high profits over shorter periods of times.
  2. Trading

    Introduction To Momentum Trading

    This trading style offers major profit potential thanks to the powerful way in which momentum can drive a stock.
  3. Investing

    3 Ways Price Momentum Can Burn Your Portfolio

    Momentum traders are always trying to ride the herd. In these three situations, however, they may end up getting trampled.
  4. Investing

    Momentum Indicates Stock Price Strength

    Momentum can be used with other tools to be an effective buy/sell indicator.
  5. Trading

    Riding The Momentum Investing Wave

    Buy high and sell higher. Find out if you could surf these risky waters.
  6. Trading

    Divergence: The Trade Most Profitable

    Comparing price swings helps traders gain insight into price momentum.
  7. Investing

    How To Approach Momentum Trading Like A Pro

    Momentum markets generate high-reward high-risk environments that confound traders until they employ specific risk management practices.
  8. Trading

    Introduction to Types of Trading: Technical Traders

    Learn about the different traders and explore in detail the broader approach that looks to the past to predict the future.
  9. Investing

    Are Hedge Funds Trying to Catch the Falling Knife? (AMZN, NFLX)

    Learn about how hedge funds continue to increase their exposure to momentum stocks and why this strategy carries both risks and potential rewards.
  10. Managing Wealth

    Finding Momentum Plays in Flat Markets

    Momentum traders should reduce frequency and size in flat markets, while seeking out story stocks that continue to trend higher or lower.
RELATED FAQS
  1. What are the main differences between momentum and trend?

    Learn to differentiate between trend and momentum, two seemingly similar concepts central to the understanding of technical ... Read Answer >>
  2. What technical tools can I use to measure momentum?

    One of the main goals of every trader using technical analysis is to measure the strength of an asset's momentum and the ... Read Answer >>
  3. What technical indicators can I use to find undervalued stock?

    Investors seeking new ideas may want to look to technical analysis to see whether the market has undervalued a particular ... Read Answer >>
  4. What are the most common momentum oscillators used in options trading?

    Read about some of the most common technical momentum oscillators that options traders use, and learn why momentum is a critical ... Read Answer >>
  5. What are the best technical indicators to complement the Dynamic Momentum Index?

    Use other technical indicators to complement the use of the dynamic momentum index in analyzing a market and determining ... Read Answer >>
  6. What is a common strategy traders implement when using the Dynamic Momentum Index?

    Learn how to implement a common trading strategy using the dynamic momentum index that traders utilize when price is near ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center