Momentum trading strategy for beginners

Before we delve into momentum trading, let us ask the question: "What is momentum in finance?" Momentum is something that drives a stock’s price in a particular direction. So, if a stock price is moving up or down over a certain period, the upward or downward momentum will continue pushing the stock price in the same direction.

A momentum trader identifies the price movement's direction and expects the movement to continue in the same direction. This is why he waits for a confirmation that the trend will continue before initiating a trade. As soon as the trader is confident about the price action, he enters a position. This means momentum trading is about the price movement's direction or speed.

Now, if a trader wants to make a profit, he obviously has to buy low and sell high. But a trader neither enters at the bottom of a trend nor exits at the top. His playground is the period in between. This is because a trend's exact starting and ending point is impossible to predict. Now, how do you identify potential entry and exit points for your trade? You need to use technical indicators such as moving averages, relative strength index, stochastic oscillator, and so on.

With the help of these tools, traders’ execute both short-term and long-term momentum trades. Short-term trades may use price volatility or shorter time frames. As the trader enters and exits the trade in a matter of minutes, hours, or days. Similarly, in long-term trades, traders use longer time frames and rely on daily, weekly, and monthly charts to filter out intraday noise. Further, one must remember that research is the backbone of a good trade.