What Is Momentum Investing?
In physics, momentum refers to the tendency of an object to continue moving in a particular direction due to its mass and velocity. The velocity, or direction, of momentum can change due to an external force and is governed by laws like Newton's laws of motion.
Momentum investing is a trading strategy that involves trading stocks that are moving rapidly higher -- or lower -- and then exiting positions before the prices begin to move in the opposite direction. A form of market timing, momentum investing seeks to exploit short-term price movements in stocks. But just like with physics, external forces can rapidly change the momentum, as well as the direction in which a stock is moving. Among other things, world events, economic factors, and industry shifts and developments can all have an impact on a stock's price.
In the fast-moving environment of stock trading, momentum investing can provide a way to capitalize on short-term opportunities. Fundamental analysis and technical analysis are two common methods used to analyze stocks. Fundamental stock analysis looks at a stock's growth potential and involves researching a company's financial records, industry trends and macro-economic events. A momentum strategy typically focuses primarily on technical analysis, including examining trends using sophisticated mathematical calculations in the hopes of predicting future price moves.
Source Fool.com
