Basics of Momentum Investing
Momentum investing is an investing strategy that is relatively new and can provide gains in all types of markets with different market conditions. Momentum investing is based on several concepts:
1. Analysts are always wrong
2. Buy High, sell higher
3. Emotion is bad when it comes to Investing
1. Analysts are Always Wrong
No analysts have called the timing of multiple market crashes. Analysts profit from making predictions and only once in a while they have to be right.
2. Buy High, Sell Higher
Most of the time, business that are doing well, keep on doing well in the short term.Â Yes, that is a very general statement.Â Short term could mean a week, 6 weeks, 6 months, or a year, but consumers tend to have a memory of sorts, competitors take some time to react, and staffing changes take time to make an impact. Winners will stay winners and losers will stay losers for a while. Momentum is taking advantage of this and runs with it.
3. Take the Emotion out of Investing
Investing is very emotional. You loose and gain value everyday the market is open. Those day to day losses can cause you to rethink things and change your strategy. Large gains can cause the same and have you leave the market earlier than needed. To prevent this, a set of criteria need to be created and tracked to determine when to buy, hold, and sell positions. When following a momentum investing strategy, track a diverse list of companies in different industries and sectors and calculate their short-term momentum rates. Then once those depreciate a by a certain amount, they automatically fall into a sell category. They must be sold without any further thought.