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This video is the preview of our course on Momentum Trading Strategies.
Momentum – 00:15 – 00:51
Example – 00:52 – 01:43
How to profit from momentum strategy? – 1:44 – 02:00
Effectiveness of momentum strategy – 02:00 – 02:36
Welcome to this video lesson on the introduction to momentum.
After completing this, you will be able to Explain momentum List examples of momentum Explain the effectiveness of momentum strategies in the past.
Momentum is the tendency of financial security to continue its price movement in the given direction.
The power of momentum trading was successfully harnessed by Richard Driehaus. His firm, Driehaus Capital Management, delivered 30% compounded annual returns in the first 12 years since 1980.
The outperformance of momentum strategy is also evident from the 212 years of US equity data. Momentum is found in different asset classes and across geographies.
Momentum for an asset’s price can be in an upward or downward direction.
For example, on 14 Feb 2020, it was reported that Tesla Factory in China started delivering cars. The closing price on 14 Feb was $800.
It kept on rising till 19 Feb where it closed at $917. That is a rise of $117 in 5 days.
Is momentum only on the upside?
No. During the Covid-19 pandemic, the demand for oil fell drastically.
Add to that an oil price war between Russia and OPEC made the situation worse. This led to WTI oil futures plummeting drastically in negative territory.
What made sellers pay buyers for oil?
This is due to the fact that the sellers did not want to pay for storage costs, as supply was more than demand. How can you profit from the momentum strategy?
You simply buy high and sell higher.
Similarly, you will short-sell when low and cover even lower. This style is contrary to value investing which advocates to buy low and sell high.
There has been a lot of debate over the effectiveness of momentum related trading strategies.
Most people think momentum is more of a fluke, however, recent research by AQR Capital tells us otherwise. It was found that a momentum strategy was profitable in all the decades, from 1880 to 2016.
But how did the momentum strategies fare when overall markets were impacted? It was found that the momentum strategies were less impacted than a portfolio of 60% stocks and 40% bonds in the top 10 drawdowns period.
In the next video lesson, you will learn to list and explain common myths related to momentum.
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Momentum in money is based upon the following crucial elements:
Volume is the quantity of a certain asset that is traded within an offered period. Volume is not the variety of deals, however the number of possessions traded– so, if 5 purchasers acquisition one asset each, it looks the like if one customer acquisitions 5 of the property.
Volume is important to Momentum traders, as they require to be able to enter and also exit placements rapidly, which relies on there being a constant stream of customers and also vendors on the market. If a market has a high variety of customers as well as vendors, it is called a fluid market as it is easier to trade a possession for money. Whereas if a market has a reduced number of buyers and vendors, it is considered as illiquid.
Volatility is Momentum Trading investors’ support. Volatility is the degree of adjustment in a property’s price– if a market is extremely unstable, it suggests that there are big rate swings, while a market with low volatility is fairly stable.
Momentum traders will seek out volatile markets, in order to make the most of short-term rises and falls in an asset’s worth. As Momentum trading efforts to capitalise on volatility, it is important to have an appropriate threat monitoring approach in position to secure your trades from unfavorable market movements. This must consist of stops as well as limits.
Momentum trading methods are generally concentrated on temporary market activities, yet the duration of a profession can depend upon the length of time the trend keeps its toughness. This could make appropriates for investors that use longer-term designs such as position trading, as well as those who prefer short-term designs, such as day trading and scalping.
Just how to start Momentum trading
Identify the property you have an interest in
Devise Momentum Trader’s trading strategy based upon technological indicators and also analysis
Practise trading in a safe environment using an IG demo account
Begin trading on real-time markets by opening up an account with IG
Conversely, you can find out more concerning trading approaches and also signs with IG Academy’s range of on the internet programs.
Search Users Vids About Momentum Trading Name and Financial market information, evaluation, trading signals and also Foreign exchange broker reviews.
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