Investing Principles

Momentum

An approach that rides the tendency for rising stocks to rise more and falling stocks to fall more — a trend-following strategy of "the trend is your friend."

In plain terms

Momentum is "hopping on the running horse." It sees a tendency (inertia) for rising stocks to rise more and falling stocks to fall more for a while, and rides that flow. "The trend is your friend" captures this.

It is different in flavor from value investing (buying what is cheap). Momentum buys what is "already rising, possibly expensive." It bets on the flow itself.

What it tells you

Momentum comes from the observation that "when the market moves one way, it has inertia to hold that way for a while." It sees people's herding and delayed reaction as keeping the trend going.

But momentum's weakness is "the moment the trend bends." When the flow changes you can be hit fast in reverse, so when to get out is the hardest part.

Formula

momentum = a strategy leaning on the tendency for a recent strong flow (up/down) to persist for a while
"buy what is rising, avoid what is falling"

What high or low means

In a phase where a strong uptrend persists, momentum works well, but in a phase where the market changes direction often (sideways, reversing), it misfires often.

Losses can grow fast when a trend bends, so momentum strategies are usually used with strict stop-losses.

Caution

Momentum is dangerous if you believe "the trend goes forever." Right after the strongest rise is often the top, so hopping on late gets you badly caught in the reversal. (This is a concept explainer, not a trading suggestion.)

Momentum bets on the flow, not fundamentals, so the basis for "why it is rising" can be weak. Chasing only the flow easily sweeps you up at the tail end of a bubble.

Metrics to read alongside

Bull Trap / Bear Trap

When riding momentum, you have to tell whether the breakout is real or a trap. Hopping on a false signal traps you in the trap, not the trend.

Contrarian Investing

Momentum (riding the flow) and contrarian (opposing the flow) are exact opposite approaches. Knowing both lets you understand two ways of viewing the market.

See it in real stocks

Search US stocks on Stocklore to see Momentum and other financial metrics alongside the sector average.

AAPL Apple Inc.MSFT Microsoft Corporation NVDA NVIDIA Corporation AMZN Amazon.com, Inc.Search stocks →

Exactly how Stocklore computes this metric (formula, thresholds, SEC source) is on the methodology page.

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.