Momentum – key to good performance in trading

The momentum indicator is key to finding profitable trades and is actually one of the indicators (after  price  and  volume ) that are good to consider. It was very hard to find sustained momentum during this bear market. This is one of the many reasons why trading in a bear market is so difficult.

What is momentum?

A measure of motion of a moving body produced by mass and velocity .

When a large body (mass) like the stock market shows some momentum, it can produce momentum in any direction. It’s a simple math equation: momentum = mass x velocity. As the SPX 500 rises over the years, its size combined with high speed can produce an incredibly strong pulse.

How does momentum affect trading in a bear market?

During a bull market, we have the luxury of patiently waiting for the trend to set in and then slowly, carefully getting on board. But since the beginning of the bear market in 2022, these trends have changed rapidly. Stocks they can reach a higher level and then suddenly turn the other way. Big, fast moves up or down are not sustainable because they lack momentum. Yes, they have speed, but they don’t have enough to change the general trend.

This scenario played out often in 2022. A few moves up gave the bulls hope. Then the momentum turned down, dashing all bullish hopes. This is the nature of bear markets. Down moves happen with much greater speed because momentum eventually pushes the market to levels below what most market watchers would expect. Thus, an extension of downward momentum is often accompanied by a sharp rally afterward.

Why the Momentum Indicator is Key for Traders

Traders look for momentum. Momentum is what helps us determine the best short-term or long-term opportunity. An instrument that shows strong momentum is more likely to quickly overcome periods of weakness, which are always present at some point.  Stocks like Tesla ( TSLA ), Microsoft ( MSFT ) and NVIDIA ( NVDA ) often show huge momentum in both directions, allowing traders to take advantage.

These stocks are not the only ones showing strong momentum. Any instrument can develop momentum. The important thing is to track the factors that make the given instrument move. It could be correlations, fundamentals, economic data, incorrect market valuation, or even just a technically strong area of support or resistance. Identifying places or causes to start a momentum that will gain momentum is a key method to achieve very good results in trading and investing.

 Head of Trading Dimitar Kalapov

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