Investing in the stock market can be done in a variety of ways; some investors seek long-term value, while others prefer fast trades. Momentum Investing is an increasingly popular method. If you’ve heard someone say, “This stock is on fire!” they’re most likely referring to momentum.
Simply defined, momentum investing is investing in stocks that are already rising in price, with the expectation that this trend will continue – at least for a time. The argument is based on market psychology: when a stock gains attention and performance improves, more investors buy it, pushing the price higher.
Momentum investing focusses on price action and market mood rather than a company’s fundamentals. This does not imply dismissing corporate strength; rather, the primary reason for buying is the stock’s movement.
Assume a stock has been steadily growing over the past few weeks, aided by high trading volume. A momentum investor would enter at this point, ride the rise, and then quit before the price corrected. Timing is important, as is discipline.
Momentum investment generally relies on technical indicators such as Moving Averages (particularly 50-day and 200-day).
- The Relative Strength Index (RSI
- MACD: Moving Average Convergence Divergence.
- Volume Trends
However, with larger potential earnings comes increased risk. Stocks can lose momentum almost as quickly as they acquire it. That is why stop-losses and good risk management are essential.
It’s also vital to recognise that momentum investing is not synonymous with blindly following hype. Not all hot stocks are worthwhile investments. You must determine whether the trend is backed by volume, if it is still possible to enter, and whether there is still room for growth.
Momentum investing may appear thrilling to beginners, but without sufficient research, it can lead to emotional conclusions. Before beginning any trade, Demystify Capital Markets always recommends starting with minimal amounts, following charts, and developing clear exit strategies.
Momentum investing is more effective in positive markets or sectors with strong trends. It is not a long-term strategy, but when implemented correctly, it may be a potent tool for capturing short- to medium-term returns.