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What is Momentum of Stock?

Momentum of Stock is the velocity of price changes in a stock. It shows the rate of change in price movement over a period of time that allows traders to ballpark the trend strength to which Momentum is associated. Momentum is measured by permanently registered price changes for a specific time period. For instance, to create a 30-day Momentum Line one would subtract the close-price 30 days ago from the last close-price.

Momentum is used by stock traders to buy stocks - going long - in an uptrend when they are looking for bullish Momentum and sell stocks - going short - in a downtrend in case of bearish Momentum. While under the effect of bullish Momentum stock price is rising, bearish momentum typically will cause the price fall. A stock is considered high-Momentum Stock if it has sustained strong price movement over a relatively short period of time.

Momentum is an imperative factor when it comes to determining strong trends. A stock trader needs to accurately identify when he or she is trading with or against the momentum of a stock, or the overall market. From another respect Stock's Momentum measures how much a stock price has risen, in contrast to its peers. Fundamental Momentum indicates how fast the company behind the stock has been growing taking into consideration a trove of fundamental data.

Momentum Trading is a popular strategy that involves buying or selling stocks according to the strength of price movements. Briefly, Momentum Trading is a 'buying high and selling even higher' trading technique. Market timing is difficult during periods of increased volatility. However, when and where Momentum in a stock price is noticed, savvy investor can spot entry points to ride the wave of positive sentiment associated with a particular stock, a sector, industry, or even the entire market. This is the theory behind Momentum Trading.

Momentum Helps Traders Determine The Strength Of A Trend

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Momentum Trading Is When Traders Buy Stocks With Rising Price And Sell Them At Peak

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Momentum Investing doesn't involve long trades only; selling is almost as important part of the process, not only to compensate losses but also to increase gains. Within a predetermined period of time a stock trader being adamant to his or her trading strategy, needs to sell underperforming stocks, if Momentum subsides, and invest in other ones that are working in line with another Momentum. This is where technical analysis comes into play, in Momentum Trading that involves stock analysis through chart patterns, stock scanners, studying of stock catalysts, reading stock market news, to identify which stocks are trending with strong Momentum, which of them has made new 52-week highs or broken through resistance levels (breakouts), or which has exhibited higher-than-average volume.

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Momentum Traders, be they investors with mid- to long-term time horizon, or Day Traders will look for strength Momentums associated to strong trends in a given direction, then enter trades to harness the profit resulted by price differences between buy- and sell-price, until Momentum abates and trend starts to lose its strength. A Momentum Trader concentrates on the main part of the price movement rather than focusing on the apex and bottom of a trend. Momentum Traders' goal is to take advantage of market sentiment and tendency that other market participants will be 'herding'; follow the majority. Three influencing factors in coherence serve as a base for Momentum Trading, such as

» Volume
» Volatility
» Time frame

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