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At first glance, momentum trading looks very similar to many other types of trading, but there are subtle differences. Both look at movements in the market price and seek out upward or downward trends. Momentum traders focus on short-term price changes in one direction or another and largely ignore a companies fundamentals. In this guide we will look at how you can use momentum in your own trading.
This can be tricky as not all upward or downward trends indicate momentum. Many markets tend to range over the long-term, with frequent, predictable upturns followed by equally likely downturns. Traders will look at data from various sources to ascertain whether a market has momentum, this can include indicators such as the relative strength index (RSI), the rate of change (RoC), and the average directional index (ADX) as well as specific events and breaking news.
Different Types of Momentum Trading
Most momentum traders will fall into other sub-groups. A technical-based momentum trader will be inclined to base buying and selling decisions on technical analysis that they will use to determine whether the market is higher or lower than expected. This type of trader will use tools like moving averages and charting software to monitor price movements and trends.
Event-based momentum traders have more in common with fundamental traders, basing decisions on company-specific events and industry news that is likely to impact share prices in a given market. However, they are generally looking at much shorter time frames than a typical fundamental investor. Most momentum traders are day traders, who aim to close out their positions before the end of the day, but a specific event can still impact prices in the space of a day, often creating a quick surge in momentum over several hours, allowing traders to make a series of quick trades.
Momentum traders aim to profit from short-term, high-volume stock movements, waiting for prices to break through resistance points and acting quickly when they do. However, this is not a practical strategy for every trader. It is worth considering if you have time to devote to the strategy, and a strong, integrated system for using technical indicators to identify and monitor momentum.
This type of trading relies on you keeping to your set objectives, entering and exiting positions strategically and making rational decisions while many other investors are making decisions following their emotions. There are various risks attached to trading in this way, and it is not for the inexperienced or overly cautious, but there are certainly healthy returns to be made by those willing to put in the time and effort to learn the right techniques and develop well-thought out strategies.
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The options for investing our savings are continually increasing, yet every single investment vehicle can be easily categorized according to three fundamental characteristics - safety, income and growth - which also correspond to types of investor objectives. While it is possible for an investor to have more than one of these objectives, the success of one must come at the expense of others. Let's examine these three types of objectives, the investments that are used to achieve them and the ways in which investors can incorporate them in devising a strategy.
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When you begin trading in the stock markets there are a lot of important things to learn. Getting to grips with trading strategies will take time and experience, but learning how to read stock charts is an excellent start. Stock charts are a visual representation of the price movements of a particular stock. They can be as simple as a line graph or they can be a complex candlestick chart with indicators to help you predict what will happen next but they all essentially show how a stocks price has moved over a particular time period.
The most common stock charts are made up of candlesticks. These show how the stock price has moved during a set period (usually 1 minute to 1 week or longer). Red ones show the price has decreased during that period and green or white ones show the price increased. The horizontal bars show where the opening and closing prices are for the chosen period and the upper and lower lines (known as wicks) show the highest and lowest levels the stock price reached. These candlesticks, named because of their resemblance to candles, make up patterns which traders use to predict where the price will go next. More on candlestick patterns here
There are typically two types of chart patterns – the reversal patterns and the continuation patterns. Reversal patterns indicate an end of the trend that the chart pattern was showing, whereas a continuation pattern indicates that the trend as depicted by the chart pattern is likely to continue.
Traders use charts as part of their trading strategy to determine the price direction on a stock as well as to analyse the potential price rise or decline on that particular stock. Different chart patterns help to analyse and predict different aspects about a stock in the market. For instance, the chart patterns like the head and shoulders, triangles, cup and handles, double/triple tops and bottoms, flags pennants, rounded bottoms, and wedges indicate the entry points for the stocks and provide critical information on stop loss levels and profit estimates. As such, stock chart patterns for beginners offer a complete strategy for trading. This is the way forward if you are interested in building your investment portfolio.
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