Is Momentum Trading Dead?

[carter 10]

Prior to the NASDAQ bubble burst, momentum trading would of made you alot of money. Entry timing did not matter... you could simply get in anywhere you want and the market would move in your favor. (to the upside) Nowadays entry has become alot more important.

 

I would like to hear traders opinion on momentum trading. Is it now considered a newbie trading method? Has it now come down to entry based on setups?

 

Carter

[Follow The Trend 10]

I still feel that momentum trading is a very interesting, and potentially very lucrative strategy - and it is not dead.

 

If you can spot a change in trend early, you can make a lot of money by riding the momentum. The trick to being a good trader is to buy at the bottom (or as near as possible) and sell before the top.

 

As Lord Rothschild once said "The reason I am so rich, is because I always sold too soon".

[ezduzzit 10]

Clearly, the days when even a blind pig could find a kernel of corn are indeed over. However momentum is a tricky thing. When it is truly obvious enough for most people to see it, it is often too late to do much about it. Assessing it early enough to benefit from it seems to be the trick. I sat in an online trading room recently for a couple of weeks wherein their software was designed solely to find and benefit from momentum in the market but I was hard-pressed to find better signals there from that jumble of indicators than from following a simple set of smoothed and enhanced moving averages.

 

As the saying goes, one man's meat is another man's poison and I think that holds true in trading as in any endeavor. Certainly momentum still exists in the markets, but it is nothing like was experienced prior to the bursting of the bubble. I try not to get too hung up on the flavor of the day anyway as whatever works today may not be working next year at this time or even six months from now, despite general psychological behavior will be quite similar.

 

I think perhaps there is great merit to the phrase "trade what you see, not what you think." Perhaps I shall change my name to MOTOman... Master Of The Obvious heh, heh.

 

Happy Trading

[Follow The Trend 10]

Ezduzzit

 

You have brought up a very interesting subject i.e. the use of software to spot trends, trading signals, etc.

 

This type of investment strategy can be self feeding, in that if enough major players in the market are using a particular software program, there is the potential for a big herd to chase a stock higher.

 

The downside to this type of trading is when the trend turns - if you are not quick enough, there is a big danger of being left behind, and seeing any profit reduce or disappear.

[ezduzzit 10]

Well FTT I may be wrong but I think that is why it makes great sense to go for the "meat in the middle" rather than trying to jump in at bottoms and hope to hold on until tops. Yes, you have to be quick and nimble with your exits, but it is perhaps best not to be too greedy and try to wring every last drop out of each trade.

 

Some even go so far as to play the game in a different manner and scale out of their trades thinking that logically it is a smart way to reduce stress and capture greater profits by leaving the least amount of their position open as a runner. Frankly, unless you are constantly getting stopped out by deep and rapid reversals or you hate having to manually adjust your stops (as opposed to using an automated trailing stop which often gets hit too early in my experience) then scaling out almost assuredly guarantees you a lesser profit than you might otherwise attain. Many traders employ that method anyway, as it lets them feel reduced risk early in the trade. There are numerous ways to slice and dice the action whether you are a momentum trader or not. The key is perhaps to just make sure it fits your personality and keeps you in the game.

 

Happy Trading

[Soultrader 12]

GREAT post ezduzzit. You are absolutely true about going for the "meat in the middle". We are traders in the business of risk. Trying to catch the dead lows and highs is gambling.

 

I do scale out of my trades with strict rules. I understand your point by not letting winners run, but is this even possible in day trading? Yes, we do see the markets trend for 100-150 Dow points but this is not the norm. Most of the time, the markets will move 20-50 points and reverse. What kind of exit rules do you apply in intraday trading? Thank you.

[carter 10]

I have never been much of a momentum trader. But the funny thing is, every now and then I will visit free day trading chat rooms. Its entertaining to hear the new traders play any stock on the fly. Regardless of the float and spread, these traders have no clue what they are doing. If you mentioned a penny stock XYZ is on the move, they will blindly buy it.

 

I think anyone can make money in a bull market. But with the way things are now, having a strategy is important. Amateur traders fuel the end of the trend. Dumping it when the momentum is at its peak makes more sense to me.

[ezduzzit 10]

Well Soul, I would agree with you that when I was trading the YM as you do, movements would often be 20-50 points before a reversal. I only did about 3 trades a day and would usually bring my initial stop back up to b/e +1 after either 10 or 12 points and if I got stopped out so be it (it actually happened about 16% of the time but it only cost me the opportunity cost of having to wait for the next trade). Then I was pretty much in a risk free trade so I often let things run with my full position until price reached the next level of S/R or I noticed that momentum in my direction had seriously begun to stall. At that point I exited regardless. If it ran further without me, I could care less. I am not the kind of guy who after a big purchase gets upset when he finds he could have gotten a better deal. I thank the good Lord for what I was given and move on.

 

As to scale-outs, I could just never personally get comfortable with exiting most of my position early on (dramatically cutting my winners so to speak) while leaving only the barest minimum of my position in for the real run. In trading the Russell I use a bit wider opening stop but I trade it much the same.

 

I feel there is no right or wrong way, only what fits your personality and trading temperament.

 

Happy Trading

[Soultrader 12]

I feel there is no right or wrong way, only what fits your personality and trading temperament.

 

I agree

 

I would love to hear some of your exit signals. Do you exit a few ticks above the next line of S&R? Also how do you use momentum to determine your exit?

 

Are you able to captuire the bigger swings without scaling out? Thanks

 

James

[Follow The Trend 10]

There is one factor which seperates all traders, guts.

 

Some traders are willing to take risks, when some traders prefer to be a little more cautious. As mentioned by a couple of people on this thread, your trading style is strongly linked to your personality.

 

All traders are gamblers to some extent, but do you gamble with a good hand, or take a punt on the final card?

 

You are what you are!!

[Reaver 10]

I definitely am still a fan of momentum trading. Check out Chick Goslin's books.