Momentum Trading Definition & Strategies
Momentum traders are truly a unique group of individuals. Unlike other traders or analysts who dissect a company's financial statements or chart patterns, a momentum trader is only concerned with stocks in the news. These stocks will be the high percentage and volume movers of the day.
Times They Trade
Momentum traders will limit the times they trade to the first and last hour of the day trading session. This is due to the increased volatility that takes place during these two time slots. The most dangerous time zone for momentum traders is during lunch (12 - 2pm), where volume dries up and the moves are choppy to flat. Many seasoned momentum traders have learned to respect this time zone as a result of a of a trading blunder.
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Tool of Choice
The tool of choice for momentum traders is the level II window. The level II window displays the bids and asks for the underlying security. As momentum traders gain experience, they will develop a keen since for the movement of the tape. The key to being a successful momentum trader is to know when to exit the position. Since momentum traders initiate positions during the most volatile times during the trading day, sharp corrections are commonplace. This is why it is imperative that prior to diving into the momentum game, traders must become acclimated to the speed of the market.
Momentum Trading - Conclusion
While momentum trading is extremely challenging, it can be mastered. One of the greatest momentum traders is Ken Wolff. He has been teaching traders how to successfully use momentum techniques since 1997. Like any other form of trading, discipline is the key to success.