Momentum strategies - start trading at nextmarkets

Last updated: 20.05.2020
Howard Friend
Author:
Howard Friend
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CFD & Trading
Experience
> 10 years

Momentum trading is a strategy used by day traders to generate quick returns on their nextmarkets accounts. Those who employ momentum trading strategies are said to capitalise on the strength of recent price trends. It’s similar to trend trading since both make decisions based on the potential for prices to increase. However, momentum traders tend to take advantage of short-term fluctuations rather than focusing on the bigger picture.

Where trend traders look to the company particulars for indications that stock price will increase or decrease, momentum traders are more interested in reactionary trades based on short-term information.

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What are momentum trading strategies?

Due to the short-term nature of these sorts of trades, momentum trading strategies tend to fall into the realm of day trading (see also Day Trading definition). While trend traders might hang on to stock in order to capitalise on long-term trends in the market, momentum strategy traders focus on the short term in order to cash in on upward trends and cash out of falling stock.

If asked what momentum trading strategies are, we have to look at how momentum trading fit within into day trading. Our nextmarkets guide on what is trading answers many of these questions.

What is certain is that, if you decide to employ a momentum trading strategy, it’s important to remain disciplined and focused.

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Top momentum trading tips according to nextmarkets

To make the most of top momentum trading tips, you need to understand the two categories of momentum trading. These categories are relative momentum strategy and absolute momentum strategy.

A relative momentum strategy is used to compare the performance of securities against one another, with investors make a decision to buy or sell on their nextmarkets based on this comparison. An absolute momentum strategy looks at the past performance and behaviour in order to determine if the price is likely to fall or rise. The majority of momentum traders will look at the past price behaviour when making a decision to buy or sell.

Find your best momentum strategy through nextmarkets

In order to find your best momentum strategy on nextmarkets, it’s important to understand the history of momentum trading and how it was discovered. When you understand where this trading strategy came from, you can see how to apply it to your funds. Many people regard Richard Driehaus as the father of momentum strategy trading.

Although not the first to employ the strategy, he was the first to pin it down and popularise it. While common wisdom says to buy low and sell high, momentum strategy is all about buying high and selling higher. His strategy was to drop the falling stock and focus on the rising stock, which is a strategy that goes in and out of fashion.

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Momentum trading strategies UK that work

Now that we understand where momentum strategy trading originated, we can start to look at momentum trading tips UK that work. Since momentum trading is fast paced and requires high price swings to be successful, it’s important to seek out liquid securities. Inverse or leveraged ETFs are less effective because they have a complex fund structure.

Regular trading vehicles are prone to crawling through smaller percentage changes, so individual securities offer the best solution for momentum strategy trading. What does this mean to the beginner?

Liquid securities include anything that is easily tradable, so avoid things like ownership interests in private companies. These liquid securities are available on the nextmarkets platform.

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Sign up today to learn day trading for beginners and momentum strategy trading techniques with nextmarkets. Our members have access to a team of trading coaches to help them learn techniques from the experts. You will also get:

  • A nextmarkets demo trading account to perfect your technique with 10,000 EUR of virtual currency
  • Access to the latest trading insights from the experts
  • Our handy mobile app so you can trade and learn on the go
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Essential personality traits for successful momentum trading

As you will see from above, while momentum strategy trading might yield strong results in a small space of time, it requires a close view of the stock markets to be able to act when prices are on an upward trend. Momentum strategy traders are typically highly focused and able to absorb a lot of information in a short space of time.

Traders need to be able to quickly identify on their nextmarkets accounts when shares are rising and falling and act on this information. While the actual trading window might be small, a successful momentum strategy trader will be constantly monitoring and assessing the market for signs of movement.

Momentum traders will typically spend a lot of time reading the news and keeping abreast of the latest developments in order to capitalise on potential momentum.

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Technical skills to learn for momentum trading

To get started with momentum trading, you will need a laptop, internet connection, a nextmarkets online stock broker and funding. Momentum trading is something takes a lot of skill, practice and experience. Momentum strategy traders possess highly advanced technical analysis skills. This means that they are capable of making decisions based on the ticker, often disregarding information about the company and acting very quickly.

Every stock chart tells a story and successful momentum strategy traders need to be able to read between the lines and quickly exclude options to land on a final decision.

The best momentum strategy revealed on nextmarkets

While technical analysis is essential for momentum strategy trading, a disciplined approach to trading is also required. This relates to the time of day when the majority of trades take place. If you look at the habits of successful traders on nextmarkets, you will see the best momentum trade strategy revealed during the first and last hours of trading.

This is the time of day when you can make the most of market volatility. Most momentum strategy traders will also close out their positions before the market closes as leaving it longer can lead to unexpected changes.

However, this doesn’t mean that they are inactive at other times of the day. Many will be glued to the markets, looking for patterns and signs of momentum.

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Some simple momentum trading strategies to try

Before you can learn some simple momentum trading strategies to try on nextmarkets, you need to get into the correct mindset for successful trading. This means developing good habits and learning where to source your information. Building a daily watch list of stocks before you’ve even started trading can help you to identify when to buy and when to sell shares.

Putting aside time to learn and perfect your momentum trading technique is essential before you dive in.

Failure to do so can lead to losses. You will need to learn to remain calm in the face of uncertainty and develop a strong sense of discipline for your cause.

Learning to identify volume factors on nextmarkets

One of the easiest momentum trading strategies to master on nextmarkets involves looking at volume as an indicator. This basic principle is that if there are more buyers than there are sellers then a stock is becoming more popular. This popularity will often lead to a price rise and a further increase in trading activity. Look for stocks with a high relative volume.

Relative volume compares the current volume to the average historical volume at that time of day. By identifying stock with a relative volume of at least 2 times higher than average, we can identify stocks with a potential to move around 20-30%.

If you need more information about stocks and shares, you can find out about stocks and shares for beginners in our handy nextmarkets guide.

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The best momentum trading methods

Many momentum traders believe that the best momentum trading methods involve keeping a close eye on the resistance level of a stock. The resistance level is the price point at which the price rise is halted by a growing number of sellers who wish to sell their stock at that price.

If a stock breaks its resistance level in either direction, this can indicate that the stock is prime for investment. Learning to identify and act on the resistance level is something that new traders will need to practice.

The best way to do this is with a virtual nextmarkets CFD trading account that will allow you to test your instincts without risk.

The other side of momentum trading

While focus so far has been on the potential for purchasing stock on the upward momentum, momentum traders also need to keep a close eye on downward momentum to ensure they drop any failing stock before it becomes damaging.

Risk control is an essential component of the momentum strategy. If you fail to keep your eyes on the screen, you might miss a trend reversal and could quickly see negative losses. The flip side of learning how to buy shares on nextmarkets is learning how to sell shares when the momentum has slowed or reversed.

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Did you know?

The nextmarkets team is committed to teaching the next generation of traders best-practice skills and techniques. For your peace of mind, we offer the following protections:

  • nextmarkets is backed by Peter Thiel, Founders Fund, FinLab, and Falk Strascheg
  • You can start trading with as little as 500 EUR
  • All funds up to 20,000 EUR are protected by the Maltese Investor Protection Scheme

Successful momentum trading strategies

Some of the most successful momentum trading strategies involve developing strong discipline. Momentum traders have to remain focused for the duration of the trading window on their nextmarkets profiles to ensure they are able to close trades at the first sign of weakness.

Traders have to remain on track and ensure every trade holds up to the mantra of buying high and selling higher. Timing is crucial for success, so traders must learn to act on their knowledge quickly and efficiently.

The potential for significant profits also comes with equal potential for loss. The successful momentum trader is able to remain calm and react extraordinarily fast in order to make the most of tight margins.

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Where to find momentum trading strategy guides

If you are interested in learning more about momentum trading, you might be wondering where to find momentum trading strategy guides. Once you have a basic understanding of momentum strategy trading, the best solution is to practice on a nextmarkets virtual account.

While this isn’t a true representation of trading on the stock market, it can help beginners to learn how to manage the risk and return tradeoff. Not every trade will be successful, but practising on a virtual account will help you to see if you have the potential to use momentum trading strategies.

nextmarkets offers a free virtual account that will allow you to start trading with 10,000 EUR of virtual currency.

The best momentum trading strategies ever for beginners

Even complete beginners can benefit from a practice account. The best momentum trading strategies ever for beginners involve learning how to identify a trade that you are comfortable with and then replicating it until you yield the results you are looking for.

Doing this on a real account could quickly result in losses that will deter you from investing in future, but learning the groundwork on a virtual account can help to mitigate those initial losses.

Even absolute beginners can learn the ropes from a virtual account with nextmarkets, so you can get answers to your pressing questions such as what are shares and what are stocks. Developing your knowledge is one of the key factors to success as a trader, even if that means going back to basics.

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What is the most successful momentum trading strategy?

By now you may be wondering, what is the most successful momentum trading strategy? In reality, the most successful nextmarkets online broker strategy is unique to each person. It involves developing a daily practice that is conducive to allowing you to do your best work. You need to be able to identify trends in the market, either by looking at absolute momentum strategy or relative momentum strategy.

You have to be able to look at stock volumes and quickly determine if they have the potential for fast upward momentum.

And finally, you need to have stringent processes in place to be able to identify when a stock’s momentum is turning in order to manage your losses. It is not a singular strategy, but a mindset which makes momentum traders successful.

Disadvantages of momentum trading

Momentum trading strategy comes with very high risk. You are speculating on trends and some novice momentum traders may enter a position too soon before momentum has been achieved.

Failure to close out a stock can also quickly eat into your profits. With so many trades taking place during the day, it can also lead to higher commission levels, although this is often offset by the huge potential for profits. As with all trading, momentum trading comes with a level of risk and it is down to the individual to decide if they are content to proceed.

Provided you have adequate risk management techniques in place, there is no reason you cannot be a successful momentum trader on nextmarkets.

Getting started as a momentum trader on nextmarkets

If you want to get started putting these momentum trading strategies to the test without putting any money at risk, you can open a free account with nextmarkets. This free account will give you access to 10,000 EUR of virtual currency which you can trade as you like. Once you are ready to start trading with real money, you can begin with just 500 EUR.

If momentum strategy trading sounds like too high of a risk and you would rather try a method like swing trading, you can read all about what is swing trading here. Other trading methods include hedging strategies and scalping strategies. Open your nextmarkets account today!

Remember, you don’t need to be an expert in all strategies to be successful. All you need is one online broker strategy that works for you.

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