Momentum
An approach that rides the tendency for rising stocks to keep rising and falling stocks to keep falling — a trend-following strategy captured by "the trend is your friend."
Momentum = a strategy that leans on the tendency for a recent strong move (up or down) to persist for a while
Momentum tends to work in phases where a strong uptrend continues, but it misfires often in phases where the market changes direction frequently (sideways or turning points).
In plain terms
Momentum means "getting on the horse that is already running." It assumes stocks that are rising tend to keep rising for a while, and stocks that are falling tend to keep falling (inertia), and it goes along with that flow. The saying "the trend is your friend" captures this.
It has a different flavor from value investing (buying what trades below its value). Momentum buys what is "already rising, and possibly carrying a high price." It bets on the move itself.
What it tells you
Momentum comes from the observation that "once the market moves in one direction, there is inertia that keeps it going that way for a while." The idea is that crowding and delayed reactions among people extend the trend.
But momentum's weak point is "the moment the trend breaks." When the flow reverses, it can turn against you quickly, and knowing when to step off is the hardest part.
Formula
Momentum = a strategy that leans on the tendency for a recent strong move (up or down) to persist for a while "Buy what is rising, avoid what is falling"
What high or low means
Momentum tends to work in phases where a strong uptrend continues, but it misfires often in phases where the market changes direction frequently (sideways or turning points).
Because losses can grow quickly when a trend breaks, momentum strategies are usually used together with strict stop-losses.
Momentum is risky if you believe "a trend lasts forever." The point right after the strongest rise is often the peak, so getting on late can leave you badly caught in a trend reversal. (This is a concept explanation, not a trading recommendation.)
Momentum bets on the flow rather than on fundamentals, so the grounds for "why it is rising" can be thin. Chasing the flow alone makes it easy to get swept up in the final stage of a bubble.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Momentum alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.