Momentum is a simple technical analysis indicator showing the difference between today’s closing price and the close N days ago. It is defined as a measure of velocity in a change in price. “Momentum” in general refers to prices continuing to trend.
The momentum and indicator shows trend by remaining positive while an uptrend is sustained, or negative while a downtrend is sustained. A crossing up through zero may be used as a signal to buy, or a crossing down through zero as a signal to sell. How high (or how low when negative) the indicators get shows how strong the trend is.
Momentum trading is an application implemented in the short-term which falls in line with periods of high velocity in price changes in the market. Traders in this space look to find securities that are moving significantly in one direction on high volume and ride the wave (or momentum) until they achieve their desired profit.
When a change in this velocity, or momentum, on a particular stock or security exists, it often is a product of technical indicators or changing fundamentals. The change is typically linked to a change in global dynamics or can be related to one particular event.
In this form of trading, traders draw their efforts onto stocks that are moving significantly in one direction and on high volume. Being a momentum trader is not an easy task – it takes a lot of monitoring of the market, identifying how quickly the stock moves and when it may change direction. For this reason, momentum traders may hold their stock positions for minutes, hours or even the entire length of a trading day.
The key here is the reliability of the price trend that is being traded. While the trend is maintained and intact, your trading strategies need to be based on what is currently going on in the market, according to the trend, and if that trend will stay consistent for the forecasted period during the time of the trade. Indicators and predictions are important at this stage as they can highlight a reversal or deviation from the price trend.
Momentum trading is principally focused on early identification of trading opportunities that arise whenever markets move strongly in one direction or another. This is an important tool for a trader as it provides the ability for early planning for a trading strategy to achieve maximum results.