All You Need To Know About The Momentum Investment Strategy

All You Need To Know About The Momentum Investment Strategy

Looking to invest in share market and ride the wave of market momentum? The momentum investment strategy might be the ticket to turning your portfolio into a high-flying rocket ship.

What is the momentum investment strategy?

In one sentence, momentum investing refers to making share market investments in the stocks that have been performing well and selling those that have been showing a downward trend.

The concept behind momentum investing

As opposed to long-term investment strategies that praise holding on to stocks even when the market conditions are going wayward, momentum investing encourages investors to act on opportunities. The concept behind momentum investing is that the stocks that have recently been performing well are likely to perform well for a few months or even years. It increases the chances of an investor gaining more returns in less time. Momentum investments can be easily made through a trading app or website.

As implied by the word ‘momentum,’ investors with a trading account compare stock performances against time and cherry-pick the ones that show the highest progress. Simultaneously, investors sell stocks that have been dry for a while in momentum investing.

How to select stocks?

Set the time frame: When using this investment technique, it’s important to standardize the time frame you’ll be assessing the stock performances over. Not doing so can result in inaccurate performance results, eventually leading to wrong investment decisions.

Select a trustable chart: After you’ve fixated your mind on the timeframe, the next step is to find a reliable chart or screener that best fits your investment appetite. You can look at the official nifty live charts or select any other screener.

Make a list: It’s a great way to shortlist stocks with high potential to give higher returns in less time. Once you’ve filtered the stock list on the chart or screener, consider making a list of the high-performing and low-performing stocks. It’s also essential to monitor your existing stocks showing a downward trend. In that case, it’s time to sell them off.

Downsides of momentum investing:

While momentum investing can sound like a great strategy for generating more returns in less time, they come with a few downsides that an investor should be wary of before proceeding with this strategy.

Limited upside potential: In momentum investing, investors decide to invest after seeing a positive trend. This fact also implies that the stock has limited progress potential in the future. In other words, it may not do as well as when the investor decided to invest in the stock.

Emotional bias: Investment decisions are dependent on emotions and intuition. Making quick decisions without thinking about long-term success in momentum investing can be a recipe for a loss. In hindsight, an investor may neglect their long-term investment plan and quickly let go of low-performing stocks.

Limited diversification: Stock trends may be affected by seasonality. Thus, one stock type might do well in the selected time frame. If investors buy stocks of just one type, they increase their risk by limiting opportunities for diversification.

In summary, momentum investing may be a great investment strategy for some investors willing to accept the risk. Momentum investing is advisable when the investor understands the market conditions and stock trends. Nonetheless, investors need to be realistic about their expectations for their desired returns.