Momentum stocks are measured by the rate of change over the past 20, 30, 50 or 250 days prior trading with special attention to the rate of change. Think of it like a rolling stone that picks up speed as it rolls downhill. It begins slowly but then continues to increase until hitting maximum velocity at which point it will stop or reverse itself.
A similar situation happens in momentum trading: The rate of change often begins slowly and then gains momentum (hence the name) until a reversal point is reached. Momentum can be positive or negative representing increasing or decreasing prices. Momentum trading is a form of technical trading or technical analysis.
Considered a bit simplistic by many, momentum trading is heavily reliant upon market timing as well as an inherent understanding of the stock or industry. So, is momentum stock trading in your future? Test your temperament:
1. Are you willing and able to spend time learning the sector or stock well enough to understand the drivers rather than the hype?
2. Are you an adrenaline junky? Apply elsewhere. Cool, calm and collective wins this game.
3. Are you good at making snap decisions?
4. Are you excellent at numbers with the ability to calculate on the go?
Want to try your hand at selecting momentum stocks without the risk?
Put your own virtual portfolio to the test right here.