Stock investing strategy-Momentum investingby J Victor on October 6th, 2011
What is it?
Simply put, it assumes that prices tend to trend in one direction, even if there is no fundamental reason for it to do so. It works similar to a roller coaster ride, when a roller coaster falls down a steep slope it tends to build up momentum, so it can do things like spinning around in loops without actually having to use any mechanical help. The momentum alone is able to push the cart.
Stocks move in a similar way, some good fundamental news can push the stocks up and start an upward trend. The pure momentum of that trend can push the stock higher and higher, well above what the true value of the stock actually is.
Successful traders such as Nicholas Darvas (who turned $10,000 into $2,000,000 in 18 months), Jessie Livermore and Ed Seykota (Who has made an average of 60% over a 10 year period) all made their amazing gains following this strategy of momentum.
Why Does momentum investing Work?
The reason why momentum strategy works is that no one wants to be left out. When a stock starts trending up, investors and mutual fund managers fear that they are going to miss the next big move so they start jumping in. This pushes the stock even higher and so on.
Is it practical for you?
Momentum investing relies on technical data rather than fundamentals. Momentum investing can work, but it is may not be practical for all investors. When you purchase a stock that is rising or sell a stock that is falling, you will be reacting to older news than the professionals at the head of momentum investing funds. They will get out and leave you and other unlucky folks holding the bag. If you do manage to time it right, you will still have to be more conscious of the fees from turnover and how much they will eat up your returns.
Momentum investing is not necessarily for everyone, but it can often lead to impressive returns if done properly.
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