Managing Momentum Trading (1)
Strategic momentum trading, in addition to practiced in the stock market, this can also be done in the forex market. Momentum trading attempts to take advantage of market volatility by taking short positions in rising stocks and selling them as soon as they show signs of descending. There are five rules that guide the momentum of trading: selection, risk, entry, management and exit.
Proper Asset Selection
Choose a liquid stake when involved in a momentum trading strategy. Stay away from leveraged or inverse ETFs because their swing prices do not accurately track the underlying index or futures market due to the construction of complex funds. Regular funds become excellent trading vehicles but tend to erode through a smaller percentage of profits and losses than individual stocks.
Look for stock assets that trade more than 5 million shares per day whenever possible. Many popular stocks meet this criteria. But the problem of low float can also turn into a very liquid instrument when the news and emotional reactions that attract the intense market participants from various sources. Notice the “sense of the day,” when new products, divisions or concepts capture the public imagination, forcing analysts to discard calculations and recalculate earnings forecasts. Biotechnology and small to medium-sized technology companies create potential future stocks well.
High Risk Control
The risk side of the calculation should be dealt with in detail, or the momentum strategy will fail. Traps of trading momentum to watch out for include:
Jumps into position too quickly, before momentum is ensured.
Closes the position late, after saturation is reached.
Failed to keep an eye on the screen, lost trends, reversals or news signs that shock the market.
Keep your position open overnight. Stocks are particularly vulnerable to external factors occurring after the close of day trading – these factors can cause radically different prices and patterns the next day.
Failed to act quickly to cover a bad position, so driving the train momentum the wrong way on the track.