While following trends isn’t always a good idea when it comes to investing, following trends is a way to maximize your returns without creating too much risk. One investing strategy that is hyper focused on market trends is momentum investing. Momentum investing is all about investing in assets which are on the upswing and, potentially, going short on assets where the price has been trending down in recent years. While this may seem simple, there are some specific technical benchmarks momentum investors look to that make it a bit more complicated than just checking a stock’s chart online.
For help with momentum investing or any other type of investing strategy, consider working with a financial advisor.
Momentum Investing Basics
Momentum investing boils down to the idea that when an asset’s price is on the way up you should invest in it, and when it’s going down you should sell or even short it. How exactly you decide when to buy, sell or short, though, is the trick that makes momentum investing interesting.
Each momentum investor will have his or her own indicators, but each normally has a set of points at which they consider an investment to be trending up or down. For instance, many use a moving average as a way to see how a stock is trending. Other possible technical indicators include price-based signals for sectors and cross-asset analysis.
Regardless of which technical indicators a momentum investor uses, once they officially show a trend, the investor will make a move.
Momentum Investing Actions
When momentum investors’ technical indicators show that a stock is on the upswing, their action is simple — put money into it! The assumption is that the trend of the stock going up will continue, and momentum investors will keep their money in the stock until the indicators show that the trend is reversing.
It’s a bit more complicated when a stock or asset is trending downward. In this case, momentum investors will short the stock. Shorting is an advanced investment strategy, but it isn’t that hard to grasp. Essentially, investors who are shorting a stock borrow shares of a stock from an investment firm in order to sell them to another investor. Eventually, you have to buy back shares to give them back to the investment firm you borrowed from. The hope is that the prices you’ll pay for these new shares will be lower, netting you the profit.
Momentum investors take a short position on assets they track as trending down in value because they believe that trend will continue, netting a profit for them.
How You Can Use Momentum Investing
As you can probably tell, momentum investing is not easy. It requires detailed technical knowledge of markets and the ability to accurately analyze data to see which stocks you should buy, sell or short. It is not for the novice investor and there are likely very few amateur investors who have the technical know-how and the time to use a momentum investing strategy by themselves.
That said, there are ways you can still use momentum investing in your personal portfolio.
The first is to find a fund whose manager uses momentum investing. This will require you to do some digging and some reading, but fund managers at various firms use all types of investment strategies, so you should be able to find one.
The other option is to work with a financial advisor who uses momentum investing. Again, this is going to require you to do some work — you’ll have to research advisors and interview them until you find one that works for your needs. You can get started in this search using SmartAsset’s free financial advisor matching service.
The Bottom Line
Momentum investing is a strategy which uses technical analysis to track which assets are trending up and which are trending down. It assumes that trends are likely to continue, so stocks going up are invested in while a short position is taken on stocks trending down. It’s a difficult strategy to pull off, so if you’re interested in employing it it is probably a good idea to work with a professional.
Investing Tips
- A financial advisor can help you with momentum investing, or they can guide you towards another investing strategy that might work for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free investment calculator to get a sense of what your investment might look like in the years to come, given an assumed rate of return.
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