Chaos Contained
When you think of momentum trading, think of the Hail Mary pass in football. There is a risk involved that can be mitigated by automated trading, but there is still risk involved. While the general advice everyone has heard about the stock market is "buy low, sell high," the idea behind this type of trading is based on exploiting volatility on a security to ride the wave up and leave as it peaks. As the momentum builds and the price goes up, a momentum trader will join in the momentum until it slows down, prompting them to jump and sell.
This is similar to a trend following strategy but focuses on the speed that an asset's price changes at. Momentum trading is taking the so-called "follow the crowd plan" and adding an extra safety net of risk management of a planned exit.
When you're that successful, things have a momentum, and at a certain point you can't really tell whether you have created the momentum or it's creating you.
Annie Lennox
Singer-songwriter
Ready to get started?
Stick to the plan, and
jump when you said.
Consider for a moment that you are waiting your turn to go skydiving, the plane keeps going up and up, but there is a specific point that you are supposed to jump off. When it is safe, the instructor counts you down, but you do not jump. There is a fear that it's too early.
The instructor, in this case, is the plan you set in place, and momentum trading requires disciplined risk management to pull off successfully. You need to jump when you planned, as waiting can lead to losses. Practicing risk management with automated trading can ensure that you do as the plan intended and prevent losses.
Tuned to the
right momentum.
With Tuned, there is a way to work with multiple trading indicators to understand momentum. RSI for example, or relative strength index, is an indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. Also popular is CCI, which is the Commodity Channel Index. It's used to establish trends in the market and see the best points to enter and exit an asset.