Momentum investing is a strategy that involves investing in stocks that have recently shown strong performance. The idea behind momentum investing is that stocks that have had strong recent performance are more likely to continue to perform well in the future.
This type of investing is based on the idea that the market tends to move in trends, and by identifying and investing in stocks that are currently in a strong upward trend, investors can potentially achieve higher returns.
Principles of Momentum Investing
One of the key principles of momentum investing is recent performance. This includes analyzing the stock’s price movements, trading volume, and relative strength (compared to the overall market or a specific sector). Momentum investors also look for stocks with a high level of institutional ownership, as it suggests that large, professional investors are bullish on the stock, and that it’s of quality. A way for a novice investor to recognize institutional buying is to look at increasing volume of the stock.
Another important aspect of momentum investing is to be nimble and quick to act. Because momentum investing is based on the idea that the market tends to move in trends, it’s crucial to identify and invest in these trends as early as possible. This requires a high level of market awareness and quick action to capitalize on these trends.
Example of Momentum Investing
For example, a momentum investor might identify a stock that is in a strong uptrend, such as a technology company that has recently reported strong earnings and has seen its stock price rise rapidly.
The momentum investor would then buy shares of that stock, expecting that the stock will continue to perform well in the future. If the stock continues to perform well, the momentum investor would hold on to the stock and potentially sell it at a higher price to make a profit.
Is Momentum Investing a Viable Strategy?
Depends who you ask, but generally, yes. Momentum investing is a viable strategy for investors who are willing to take on higher risk in pursuit of higher returns. The strategy is based on the idea that stocks that have had strong recent performance are more likely to continue to perform well in the future.
This is supported by academic research which has found that momentum investing can be a profitable strategy. Once again the key to success with momentum investing is to identify and invest in stocks that are currently in a strong upward trend, as early as possible.
What is Dual Momentum Investing?
Dual momentum investing is a strategy that combines two types of momentum: relative strength and absolute momentum.
Relative strength is when you compare a stock’s performance to the overall market or a specific sector. If a stock is performing better than the market or sector, it’s considered to have relative strength.
Absolute momentum is when you look at a stock’s performance over a certain period of time. If a stock has gone up in price over that period, it’s considered to have absolute momentum.
Dual momentum investing uses both relative strength and absolute momentum to identify the best stocks to invest in. The strategy is to invest in stocks that are both showing relative strength and absolute momentum.
Example of Dual Momentum Investing
For example, imagine a stock that has gone up a lot in price over the last month and is also doing better than most other stocks in its industry. This stock would have both relative strength and absolute momentum, and would be considered a good stock to invest in according to the dual momentum strategy.
Dual momentum investing is a way to combine different types of information to make better investment decisions. It’s a strategy that can help you find stocks that have the best chance of growth in the future. It’s important to note that this strategy is not suitable for short-term investors or those who can’t handle volatility.
Final Thoughts on Momentum Investing
Momentum investing requires discipline, market awareness, and the ability to act quickly to capitalize on trends. With a bit of research and a keen eye on the market, momentum investing can be a powerful tool for achieving financial success, and certainly a strategy to add to your portfolio.