Momentum Trading

A strategy that involves buying assets that are trending upward and selling those trending downward.

Momentum trading is a strategy based on the idea that assets that have been rising tend to continue rising, and those falling tend to continue falling. Momentum traders ride existing trends rather than trying to predict reversals. They buy stocks showing upward price movement and sell (or avoid) stocks in decline. This strategy works because trends often persist due to underlying fundamental changes or market psychology.

On Sporty Stocks

In sports stock trading, momentum trading means buying teams that are on winning streaks and seeing their prices rise. A team that wins 5 games in a row typically sees continued price appreciation as their championship odds keep improving. The risk is that the momentum can reverse suddenly with an unexpected loss or injury.

Example

The Toronto Maple Leafs win 7 straight games and their stock rises from 5.00 SC to 9.00 SC. A momentum trader buys at 9.00 SC, expecting the winning trend to continue. Over the next two weeks, the Leafs keep winning and the stock reaches 13.00 SC. The trader sells for a 44% profit.

Questions