1. Introduction to Stock Trader Types
  2. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  3. Decision-Making Methods: Informed, Uninformed, Intuitive
  4. Informed Traders: Fundamental Traders, Technical Traders
  5. Swing Traders
  6. Buy and Hold Traders
  7. Value Traders
  8. Trend Traders
  9. KISS Traders
  10. Momentum Traders
  11. Range-bound Traders - Break-out Traders - Channel Traders
  12. Options Traders
  13. Options Seller Traders
  14. Day Traders
  15. Pattern Day Traders
  16. Intra-Day Traders
  17. Intra-Day Scalp Traders
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion

Momentum traders focus on acceleration in a stock’s price or in a company’s earnings or revenues. These traders then take on a long or short position in the stock, in the hopes that the momentum will continue in the same direction. In this way, momentum traders are akin to trend traders, although they tend to rely primarily on short-term movements rather than on fundamental particulars of companies. Momentum trading can be difficult to accomplish successfully, making it a branch of trading that is typically reserved for experienced investors.

In a momentum trade, an investor will time his or her buys and sells based on how quickly the stock is moving. Unlike many other types of traders and analysts who focus primarily on a company’s fundamentals or on technical analysis, momentum traders are primarily interested in what is going on in the news. They are looking for stocks which move by a high percentage or volume.

Requirements for success as a momentum trader

Momentum traders require high levels of focus and attention. They must remain steadfast when they have caught a bit of momentum in the right direction but a target has yet to be reached. In this way, these traders exercise huge degrees of discipline.

Most momentum traders are day traders, meaning that their moves happen very quickly. Timing is thus crucial to the success of a momentum trade. Within the broader category of momentum trading, there are at least two smaller subgroups: technical-based momentum traders and event-based (or fundamental) momentum traders.

Technicals-based momentum trader

A technical-based momentum trader makes decisions based on his or her perception of the market as being either higher or lower than expected. They utilize technical analysis to determine these assessments. If a trader finds that the market prices are higher than they believe they should be, they will short a stock now and buy later. If they believe the prices are lower than they should be, they’ll buy now and short later.

Event-based (fundamental) momentum trader

A fundamental-based momentum trader bases his or her decisions on market volatility which results from news and other activity happening across a trading day. When a big piece of news hits the airwaves, the market typically reacts with an increase in volatility. This period of heightened volatility often lasts for several hours. Momentum traders may try to make money through a series of rapid trades in the areas which are fluctuating.

Strategy and techniques of momentum traders

Momentum traders focus on more than trends in stocks. They look to stocks which show a strong move in a given direction, typically with high volume and over a distinct time period. They then buy stocks which have been trending in this direction, aiming to capture waves of investor enthusiasm which have temporarily prompted new highs or lows in trading.

Traders using the momentum strategy often draw their data and analysis from the following sources and techniques:

  • Daily watch lists

Momentum traders often follow a daily watch list of stocks and are typically glued to televisions, message boards, brokerage apps, and more.

  • Volume as indicator

Traders making decisions based on momentum follow trade volumes as a major indicator. If there are more buyers than sellers and a stock is becoming popular, the price tends to rise, and trading activity is further increased.

  • Resistance levels

Once they’ve identified a stock that is trending in a certain direction, a momentum trader will look for companies with stocks that are testing their resistance levels. If a stock breaks a resistance level in either direction, it is a prime candidate for investment.

  • Technical indicators

In order to identify a resistance break, momentum trading looks for technical indicators. Some stock trading programs analyze these trend lines automatically. Momentum traders are less concerned with buying at bottoms and selling at tops; instead, they make moves based on a price trend after a stock has clearly passed a resistance point, then sell or short that stock when they have achieved a profit.

  • Conservatism as a grounding strategy

Momentum traders have to know when to cut their losses. They look to eke out small profits on a daily basis, but sometimes their momentum trades fail. In this case, it makes more sense to exit a position than to hold onto it in hopes that it will turn around again. Still, traders who are adept at navigating resistance points can trade with a fair degree of safety. There is always some risk associated with trading, however.

  • Trading times

Usually, momentum traders focus on the first and the last hour of each day’s trading session. In these times, there is a flurry of activity which results in higher volatility. They also close out all of their positions by the end of the day, as leaving positions open overnight can result in unexpected changes to momentum.

  • Discipline

Discipline is essential for momentum traders. They typically follow one or two stocks at a time, and they have to react extraordinarily quickly. They need to use margin in many cases in order to generate significant profits, and this amplifies the risk they take on.

Determining momentum

One way to determine market momentum is through the Average Directional Index (ADX) indicator. Readings below 25 tend to indicate that the market will offer strong pullbacks to initiate swing trades, while readings above 25 suggest a strong trend with minimal pullbacks. Thus, momentum traders look for ADX levels of 25 or greater.

The reason that momentum trading can be successful is that well-performing stocks do tend to continue to outperform the broader market. The exact reasoning for this is unclear, but it may be because of irrational investor behavior and herd mentalities, or it could be due to the fact that some of these companies are better-managed than their competitors. In truth, though, momentum traders don’t care about the reasons; they only aim to have the best modes of analysis for recognizing and trading stocks which they feel have sufficient momentum.

Dangers of momentum trading

There are some particular risks associated with momentum trading. If it is executed properly, it is linked in some cases to a type of trading called high probability trading. Still, if a momentum trader happens to enter a position too soon, and it turns out that momentum has not been achieved, that can be a problem. Similarly, if the trader closes the position too late, after the saturation point has been reached, this minimizes profits. Similarly, if momentum traders happen to miss news stories, they can completely miss out on their investment opportunities.

Momentum trading is considered one of the more difficult approaches, but the possibility for significant profit is high, especially because momentum tends to be the single greatest factor in a stock’s price movement.

Conclusion

Momentum traders use a short-term strategy that aims to profit off of high-volume stocks movements. These traders look for breakout points in price and then follow them with their trades. They tend to close out of their positions by the end of the day and use margin to help support their gains. It is a spur-of-the-moment trading strategy which requires close analysis and lightning-fast reflexes, so it is typically a strategy reserved for advanced traders.


Range-bound Traders - Break-out Traders - Channel Traders
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