Momentum trader

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    Momentum traderA momentum trader focuses on assets that are moving in one direction with high volume.

    Momentum traders will focus on how quick and strong the movement is, that is, how quickly the price action accelerates in a single direction under increased volume from additional buying or selling pressure. Momentum traders do not focus on a specific period of time, meaning that momentum traders will hold positions from a few seconds up to a few hours depending on the momentum of the move.

    What increases momentum in the markets?

    Market momentum can increase suddenly for any number of reasons.

    In a technical sense, when strong support or resistance level is overcome and a break out occurs, many traders may enter into the market. For example, when price reaches a resistance level, then there are likely to be traders entering into a sell position and will place their stop on the other side of the resistance level. These stop losses are essentially ‘buy’ orders that close the short positions if the market price moves against the short trade.

    If the price then breaks through the resistance level, then these stops are executed which places added buying pressure on the markets, accelerating the price even further.

    Additionally, more traders who are watching the market, but have not yet entered, may also enter into long positions, because they can observe an accelerated movement in price to the upside; adding to the momentum.

    On a fundamental level, market momentum may increase when there is a significant event that has happened, such as an earnings report from a company affecting the stock price, or a specific economic report affecting the price of a currency. When these events occur, then traders react by entering into the markets, increasing the trading volume.

    Further reading

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