Momentum trading

Momentum trading is an investment strategy involving buying an asset that has shown a significant movement in price or volume. Momentum trading can be explained by the buy high, sell even higher plan.

Momentum trading is a strategy that describes supply and demand in financial markets, particularly in price fluctuations, and suggests that asset prices that have been rising steadily are likely to continue rising for more time, or vice versa for asset prices that are falling. This can be explained by the tendency of asset prices to rise or fall from their current values.​

Its framework is similar to that of a trend-trading system. Momentum traders use indicators to measure price movements and calculate trends. Some indicators measure the strength of the market, in which case traders would buy into markets that are rising and sell into markets that are falling.​

Other momentum indicators measure the momentum change, determining when to trade and in what direction to go. The goal for every trader using a momentum indicator is to spot turning points before other investors do. When price trades above a moving average, buys above an uptrend line, or breaks through resistance levels, this information tells traders that buying is the right way to play the trend and they should increase their positions.

​When price trades below a moving average, sells below an uptrend line, or breaks through support levels, this information tells traders that selling is the right way to play the trend and they should decrease their positions. When these signals start appearing, traders open new orders or modify existing ones to benefit from the anticipated profits.