Momentum Trading
Buy what is strong, sell what is weak — the simplest edge that refuses to die.
MomentumBuying recent winners and avoiding recent losers. trading is deceptively simple: buy what’s already going up the strongest, and avoid or sell what’s going down the most. Rather than hunting for cheap, beaten-down stocks, you deliberately buy the winners — betting that strength tends to persist.
MomentumBuying recent winners and avoiding recent losers. works because of human behaviour, and it’s one of the most robust, persistent edges ever documented across markets and centuries. Why does it persist? Investors under-react to good news at first (so winners keep climbing as the crowd slowly catches on), then eventually over-react (herding piles in). It feels deeply uncomfortable — you’re buying things that already look “expensive,” which our instincts hate — and that very discomfort is *why the edgeA repeatable, structural reason your trades win over time. survives*: most people can’t bring themselves to do it. The market pays a premium to those willing to buy strength.
- Relative strengthHow a stock performs versus the market or peers. — rank stocks by recent performance and favour the strongest; momentumBuying recent winners and avoiding recent losers. is often relative (strongest vs the rest), not just absolute.
- Buy high, sell higher — the mindset flips “buy low, sell high”; you accept buying winners because winners tend to keep winning over the medium term.
- Exit discipline — momentumBuying recent winners and avoiding recent losers. can reverse sharply when the herd turns, so trailing stops and trendThe prevailing direction of price: up, down or sideways. exits are essential to protect gains.
Common mistakeRefusing to buy a strong stock because it “already went up too much,” then buying a falling one because it “looks cheap.” That’s the anti-momentumBuying recent winners and avoiding recent losers. instinct — and it fights a well-proven edgeA repeatable, structural reason your trades win over time.. Strength persists more often than our bargain-hunting brains expect.
ExampleA momentumBuying recent winners and avoiding recent losers. trader screens for the top relative-strength stocks and buys the leaders, ignoring the laggards that “look like better value.” Over the cycle the leaders keep leading and the cheap laggards keep lagging — the uncomfortable trade (buying strength) is the one that paid.
Key takeawayMomentumBuying recent winners and avoiding recent losers. trading buys strength and avoids weakness, betting recent winners keep winning. It’s a robust, persistent edgeA repeatable, structural reason your trades win over time. rooted in under- then over-reaction — and it persists precisely because buying “expensive” winners feels wrong to most people. Use exits/trailing stops, since momentumBuying recent winners and avoiding recent losers. reverses fast.
FAQs
Isn’t buying stocks that already rose just chasing?
It feels that way, but disciplined momentum is different from emotional chasing: it’s systematic (ranking by relative strength), risk-managed (defined exits), and backed by extensive evidence that strength persists over medium horizons. The danger is doing it *without* rules — momentum needs strict exits because reversals can be sharp.