Momentum Trading: High Risks For Higher Rewards

Momentum trading is an important strategy for online stock trading adopted by a number of investors willing to take a higher amount of risk for substantial gains. In this method of trading, one tries to identify stocks which are showing significant momentum and buys them to ride the momentum to make the best gains possible. It is different from value investing because in it generally one would try to buy low and sell high but momentum trader would wait long enough to make sure that the market is indicating continuity of momentum before buying. So, a momentum trader usually buys high and aims to sell higher.

It is of utmost importance for a momentum trader to exhibit high levels of discipline and not be taken in by emotional highs and lows that come along with the market movements. One of the foremost things is to be able to identify the right entry and exit points in this type of online sharetrading. A number of traders employ moving averages to identify the right entry point by trying to determine market inertia and momentum at a given point of time. With a careful use of moving averages, a trader tries to look for buy and sell signals.

It is important to understand the role played by moving averages. Essentially, they act as directional indicators showing key support and resistance levels which are important to understand the nature of price movements in stock markets within a given time frame. These concepts help deal with the volatility factor to an extent and understand price turnarounds better which is what momentum trading is all about. Basically, support level represents a price level below which the prices for a certain stock has not fallen for a time period of weeks or months represented by a trading chart.

On the other hand, resistance levels are those above which the stock prices have not gone in a certain time period. These are not hardcore concepts which pre-determine what will happen to stock prices but only represent a certain amount of probability based on past movement of prices that they may not push through these limits in near future. However, it is always better for the momentum trader to have a contingency strategy to deal with any unexpected changes in price movements. In short, momentum trading offers a lot of opportunities to make good gains but one must weigh the risks involved against the advantages before using this strategy.http://www.ashlaronline.com