A Shockingly Simple Stock Trading Momentum Indicator
Trend trading is the one of the best and most profitable trading strategy used by many traders. Infact, spotting a trend at the right time and riding it till the end can make you rich. When you are trading a trend, you are intereste din knowing how fast the trend is changing or what you may call moving whether it is moving up or down. When the rate of change of a trend goes up, it means that the price action is soon going to follow suit and rise as well!
What we have been talking about is Momentum! Just like high school physics, momentum is the rate of change and is calculated by dividing the closing price today by the closing price ten days back and multiplying it by hundred.
This is your shockingly simple momentum indicator that you can use profitably in your trading. Now, if the price did not change, the momentum indicator will obviously will be 100. If the price went down, the momentum indicator will be less than 100 and if the price went up, the momentum indicator will be more than 100. Now, when the momentum indicator is greater than 100, the trend is expected to continue in the future.
This momentum indicator tells you what is most likely to happen in the future not what happened in the past. So it is a leading indicator. You must have heard about momentum investing or you can even call it momentum trading. In momentum investing , you buy a security at a high price and sell it even at a more higher price unlike ordinary investing where you buy low and sell high. The trick is to know that the price will continue to rise when you do momentum investing. How do you know that the security prices will continue to rise in the future? By looking at the business fundamentals like the sales or profits, if you find them to be rising and accelerating at the same time the security price is rising,there is momentum behind this move!
As said before, instead of investing in a security or a stock you can do momentum investing. When you are doing ordinary investing, you are waiting for its price to appreciate to give you a capital gain. This price appreciation might take from a few months to even years tying down your capital in that investing. However, in momentum investing, you search for stocks that have rising prices that are expected to continue for sometime. So you buy high and sell even higher within a few weeks making a decent profit. You can use that profit to do more investing.
What a momentum investor is looking for is a security that is going to move big. But this move big is going to happen on a long term horizon instead of a few days. The expectation is to make money on the longer term. The thought is that if the security is starting to go up in price, it will keep going up in prices unless something dramatic happens to change. In the meantime, you can make a lot of money.
There are many way to do momentum investing. One is the price momentum that we have talked above. The other can be Earning Momentum. If you are a long haul investor who keeps an eye on the financial statements of different companies and you find that the quaterly earnings are going up steadily from one quater to another. What this means is that the stock price will also accelerate and follow suit.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Get this 49 page Quantum Swing Trading Report plus the shocking Profit Button Report that applies no matter what you trade- stocks, forex, futures or options FREE. Download this very simple 1 Minute Forex Trading System FREE that makes money anytime instantly.
by: Ahmad Hassam
Total views: 24
Word Count: 605
Date: Wed, 10 Mar 2010
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