Momentum trading basically takes advantage of market volatility by short selling rising stocks and selling them once the first signs of falling prices. Basically, the idea is to buy high and sell higher, selling the losing stocks while riding other winners What is buying on margin.

If you are planning on becoming a momentum trader, you should learn great amounts of risk management. That’s because you are practically going head on with market volatility. You are also in risk of overcrowding, reducing your overall profit.

In this article we will talk about the skills and activities you should do in order to become a momentum trader. Read on!

Security Picking

Avoid leveraged ETFs or inversed ETFs since their price swings do not really accurately trace the underlying indexes or futures markets. That’s largely due to their complicated structure. In addition, regular funds tend to chip away from your capital and earnings through smaller gains and losses.

The simple solution is to seek liquid assets instead.

Go for the securities that can trade more than 5 million shares per day. You can go for popular stocks. You can also go on the hunt among low float issues, which can turn into highly liquid instruments Broker Spreads and Conditions.

Also, keep an eye on the next hot thing in the market, such as a new product that amuses the market’s attention. This usually pushes analysts to drop their initial calculations and re-assess their profit estimates.

Risk Management

Just like in any other trading strategy, you must address and acknowledge all the potential risks you might have to face.

You should avoid many things, too, such as entering a position too early or exiting one too late. You can say that you’ve entered a position too early when you haven’t confirmed a momentum move. And you can say that you’ve exited a position to late when it’s already oversaturated.

You have to keep close tabs on market developments and try hard not to miss trends and reversals. You should never ignore important news that can affect the market.

Entry

Searching for the best momentum trades can be quite tricky. However, all you really have to remember is that the best momentum trade comes after a shock in the market. The news that takes the market by surprise can be a very good opportunity.

Such kind of news can trigger quick price movements, which set off buying and selling signals. You have to be observant if you really want to get instant profits. Your momentum capital should also come as the trade evolves. In turn, that will generate swings that shake weak trades.

Position Management

You cannot really be a master of position management overnight. They carry wide bid and ask spreads. They also require bigger movement to reach profitability. If you accomplish the latter, they will also grind through wide intraday ranges that expose stops. This is also true even when the technical are unmoved.

You also have to choose your holding periods cleverly. The risks increase faster the longer you stay in the position.