Momentum Trading is a trading strategy based on the inertia of price movements. Traders identify assets in an upward trend to buy and sell assets in a downward trend, aiming to profit and exit before market momentum exhausts. The core assumption of this approach is: assets that perform well will continue to rise, and those that perform poorly will continue to fall.
How Technical Analysis Drives Momentum Trading
Momentum trading relies heavily on technical analysis. Traders typically depend on chart analysis, technical indicators, and price data rather than company fundamentals to determine entry and exit points. Among these tools, the Relative Strength Index (RSI), Volume Weighted Average Price (VWAP), and Moving Averages are key for trend identification. By combining these indicators, traders can more accurately capture market turning points and optimize their trading decisions.
Real-world Examples of Momentum Trading
2020