There are many strategies for trading stocks. Momentum and position come up in our radar as two of the most interesting types of trading strategies. It would make sense to discuss the two strategies side by side as they are relatable.
Two Strategies of Momentum Trading
There are two basic concepts behind the strategies of trading on momentum. You could look for major news stories on stocks to inform your trades or rely on technical analysis. Momentum traders are keen on international news. Historically, deferent events in politics and business may cause spikes on different assets. The news can inspire a trend in the markets. The goal of the trader is to take advantage.
The use of technical analysis is also popular among momentum traders. In this approach, you will be looking for stocks that demonstrate strong moves. You open a position when an asset is on a strong trend and close the position when the volume diminishes. Price surges are common indicators of exhaustion.
You can use both technical analysis and news feeds to inform your trade. Using both approaches boosts your confidence and increases your chance at a profit.
Momentum Trading: Entry and Exit Indicators
The average momentum trader is not obsessed with precise entry and exit points. Instead, the trader focuses on the strength of a specific move and its continuation. Unlike the swing trader, a momentum trader is not keen on breakouts and pullbacks of stock prices. What you are looking for as a momentum trader is a stock that will move in a particular direction. While this trading style heavily bases itself on fundamentals, it does rely on indicators like oscillators and moving averages for entry and exit signals.
The best opportunity for a momentum trade is when a stock is preparing to make a long term move. Momentum trading is not an intraday affair. The trades could last for weeks or months. For this reason, a momentum trader is not worried about entry points. Instead, the trader will double down on technical analysis to determine when to make the next move. A popular indicator in the momentum world is the 200-period moving average. When the price of an asset move above or below this indicator, it could be time to take action.
Exit points are reliant on volume, news stories, and events. When the volume begins to wane, traders are looking to close positions. Similarly, if a news story breaks that may likely reverse the trend, the trader will close the position.
The Difference Between Momentum and Position Trading
Position trading is similar to momentum trading. Both strategies hold onto positions for weeks to months or years. The difference is that position traders have an obsession with entry and exit points. As a position trader, your goal is to be in the trade when the prices reach your target. Position trading may involve adding to your position as the stock moves to your favor in the coming days, weeks, etc. This strategy needs great confidence in the underlying fundamental factors that drive the price of an asset.
Another difference between the two types of trades is the strategy of entry. Position traders believe that an asset will move in one direction over some amount of time. The trader is willing to enter the trade early in small sizes. As the direction becomes more defined, the trader will add on to his or her position. Stocks do not move in straight lines; therefore, there are opportunities for entry in short-term retracements and pullbacks.
Position Trading Takes Advantage of Pull Backs
Pullbacks present opportunities for increasing the position of the position trader. To be proficient in position trading, you need to learn how to contain your emotions. Do not panic sell while other traders are liquidating. Short-term moves like pullbacks should be anticipated. Use such opportunities to increase your position.
Some pullbacks may drag your position underwater for a little while. An emotional trader will cut his/her losses at this point, but the confident trader will persevere. For both position and momentum trading, you will require quite a sizable investment. This is because you will be holding positions tor the long-term, and you need sufficient room to cushion possible losses.
The key to success in position trading involves trading stocks that have established a solid fundamental direction. Aim for directions that can continue for weeks or months, if not years. Position trading requires high levels of confidence and skill to open an initial position and increase that position over time.
Stock trading is an excellent opportunity to invest your hard-earned money. To succeed in the stock market, you need relevant education to inspire your journey. To learn more about different trading strategies, check out some of our articles.