If you are a trader then you would agree that one should never attempt to position against the trend. At times you would feel that the valuations have gone completely crazy, and that very thought might compel you to trade against the momentum. What next? You find yourself grappling with deep losses as the momentum regained its strength and caught you by surprise. Market has its own reasoning and we can only do the guess work, so it’s better to ride the trend than attempting something adventurous. We are traders and at the end of the day we just want to make money. So, let’s learn how professional momentum traders take advantage of price volatility while riding a trend.
Individual stocks provide maximum price momentum, but they can be extremely volatile to trade. Those who are not comfortable with price volatility they can trade in ETFs. The trend could be up or down and you have to stick with the trend as it is always likely that the momentum will keep returning back after phases of corrections and consolidations. Mostly, traders look for stocks making new highs for momentum trading. You can even trade downward momentum by short-selling stocks, but it is a complex trade and only professionals should do it.
Buying stocks that are making new highs is difficult as valuations appear stretched most of the time. But trading history suggests that stocks making new highs have the tendency to make even higher highs. So, the real play is to identify such stocks while they are in their early days of an uptrend. At all times you should be prepared to deal with volatility. The key is to stay in the game and not attempt to bag a few jackpots. You need to manage your risk and strategize to buy and sell whenever the opportunity emerges. Professionals use stop-losses to curtail risk emerging from sudden crashes and trend changes, and some even use hedging techniques to cover their risks.
There are a whole host of technical analysis tools that can help you in building momentum trading strategies, but for that you need to learn a lot before you can implement them successfully.
Using technical indicators to identify early momentum works most of the times, but you should take utmost caution while implementing trade strategies as a false signal can put you in serious trouble. Traders should also understand that momentum tends to be strongest at the initial stage and as the prices head higher it slows down considerably. Eventually, it enters a sluggish phase before the trend changes. So, you shouldn’t think twice about exiting your positions as soon as you see the first indications that the momentum is dying.
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