The stock market is an important piece of the American economy, but it’s also one that most Americans don’t participate in directly. One survey found that only 43 percent of Americans own stocks. Millennials are the least likely group to participate in the stock market, in large part because they feel like they don’t have enough money. The second-most common reason, though, is confusion about how trading stocks works. The money thing can be hard to solve, but developing a trading strategy isn’t as difficult as you think. Let’s take a brief look at momentum day trading strategies.
Understanding Momentum
Before we can understand momentum trading, we have to be able to understand momentum. Momentum has two basic definitions. The more technical one refers to physics, and it’s “the quantity of motion that an object has” based on mass and velocity. There’s even an equation for it. That’s good information to have, but we’re more concerned with the general meaning of the word momentum, which is used to describe everything from sports to relationships. There are no equations in this definition. Think of momentum as a man who starts running slowly and then gets faster and faster. The faster they go, the harder this man is to stop.
Let’s say you’re talking about a new person you’ve been seeing. If a friend asks how things are going, you can say, “Things are going well” or you can say, “I really think we’ve got some momentum going.” They mean similar but not identical things. Obviously, momentum can still be halted, but there’s still an aura of invincibility that attaches to some people or teams with a strong sense of momentum. In 2008, most of the sporting public assumed the New England Patriots would win Super Bowl 42 because they had won every other game they played that season. Instead, the New York Giants shocked them by pulling off the upset. It’s important to remember that the appearance of momentum won’t always line up reality.
Momentum Day Trading
To understand momentum trading strategies, you have to realize just how volatile Wall Street really is. If you’re not paying attention, it may seem like a relatively stable operation for the most part. That’s because most of us don’t notice it unless something has gone terribly wrong. But experienced traders know how to use volatility to get rich. If you’re monitoring the market and notice a stock is going up, momentum day trading says you need to jump in and buy while the trend is still going in the right direction. Keep in mind that you aren’t going to be keeping this stock for very long. In fact, you may be selling it in just a few hours. In gambling terms, you can’t “let it ride” for very long. Letting it ride suggests passivity, and this is not exactly a passive trading strategy.
How can you tell if a stock has either upward or downward momentum? What if it’s just a temporary blip in one direction or the other? The more you observe the stock market, the better you’ll get at spotting certain indicators that tell you when it’s time to make a move. Look for multiple signs instead of just one, since that means it’s more likely that what you’re seeing is a bonafide trend. It will also help if you can look at pricing charts and understand what terms like candlestick length mean in relation to stocks. Stock trading comes with its own jargon, and you need to have a basic familiarity with the lingo to have the best chance of succeeding, regardless of whether you’re interested in momentum trading or another strategy.
