Momentum Stock Trading
Not a good investment strategy?

The momentum stock trading strategy for investing in the stockmarket can be quite successful in a raging 'bull' market or in stockmarket booms where prices of stocks are rising across the board - providing you manage to sell in time.

Why do I avoid this strategy? I had no reason to buy the stock in the first place other than that its price was rising. Hence it is difficult to know when to get out, other than I might be finding it difficult to sleep at night.

I would be gambling that the stock will continue to rise, but would have no means of knowing how far. A sell decision then becomes difficult to make.

It is even more painful if you sell too early and the stock keeps rising. Greed is a strange animal!

As a result, I do not consider this to be a good investment strategy - and not one for picking good stocks for the longer term.

A crafty version of momentum investing - one that I tried in the past when searching for a winning strategy - is to buy into rising stocks while limiting greed.

I used to place a 25% profit cap on each stock and disciplined myself to sell when that profit level was reached.

The (gambling) rationale was that stocks tend to rise with the overall stock market over time. Stock market fund managers love to show graphs of how the stockmarket index has risen continually over the last 100-odd years.

However, market reversals look smaller over longer periods of time!

The problem with my strategy was that while some stocks hit the 25% jackpot quickly which suggested that this was a good short term investing strategy, others took up to five years to do so.

Of course 25% over five years equates to 5% per year, a somewhat miserable return on equity.

A further problem was that other stocks went down hill. I put a 20% loss limit on those and wrote off the loss on tax to minimise the pain. Not very smart investing!

Why avoid it? Momentum stock trading,whatever the limits placed on greed, works best in 'bull' markets and performs miserably in 'bear' markets when the overall price trend of stocks is down.

I think twice about using momentum stock trading when I choose stock using good investing principles. But it is amazing how commonly some financial advisors suggest you do.

Return from Momentum Stock Trading to Best Investment Strategies