Momentum trading is a strategy that takes advantage of ongoing price trends in financial assets. It involves purchasing assets that show significant upward price movements or selling those with pronounced downward trends, holding them until there are indications of a reversal. The fundamental concept is that the momentum of an asset, or the intensity and speed of its price movement, can serve as a reliable predictor of future price direction.

This method operates under the assumption that price movements in a certain direction will likely persist over the short to medium term. Hence, momentum trading can be described as a strategy that concentrates on buying and selling financial instruments based on the strength and duration of their price trends.

Traders who practice this method believe that once the price of an asset begins to move in a specific direction, it is probable that it will maintain that trajectory for a period before reversing or losing its momentum. The primary notion behind momentum trading is that market participants tend to follow prevailing trends, leading to sustained price movements in the same direction. This behaviour can stem from various influences, including investor psychology, market sentiment, and news developments.

To implement a Momentum Trading Strategy, traders can follow these steps:

Identify appropriate financial instruments: Traders need to spot financial instruments that display strong price momentum and distinct trends. This can be achieved through analyzing historical price data and utilizing technical analysis tools.

Determine entry and exit points: Based on the trends identified, traders should establish their entry and exit points for each trade. This often involves using technical indicators like moving averages to assess the strength of the trend and pinpoint potential turning points.

Execute Trade: After defining entry and exit points, traders can carry out their trades in line with the current trend. For example, if the trend is upward, a trader would purchase the financial instrument, expecting the price to keep rising. Conversely, if the trend is downward, the trader would sell or short the instrument, predicting an additional price drop.