What Is Momentum Investing?

Published: Saturday, September 6, 2025 at 9:15 am

Momentum Investing: Riding the Wave of Market Trends

Momentum investing is a trading strategy that aims to capitalize on short-term price movements in stocks. This approach, a form of market timing, involves identifying stocks that are experiencing rapid price increases or decreases and then strategically entering and exiting positions to profit from these trends.

The core principle of momentum investing is based on the idea that once a stock begins moving in a particular direction, it will continue to do so for a period of time. Investors using this strategy typically buy shares of a security as its price appreciates, aiming to sell before the trend reverses. Conversely, they may short shares of a depreciating security, exiting the position before a price recovery.

Technical analysis is the primary tool used in momentum investing. This involves examining trends using mathematical calculations to predict future price movements. Investors rely on technical indicators based on price, volume, or open interest to assess whether a stock's momentum will continue.

While momentum investing can offer opportunities, it is also associated with significant risks. The strategy relies on the continuation of trends, which can be disrupted by various factors. External forces, such as world events, economic shifts, and industry developments, can rapidly alter a stock's price trajectory. Moreover, momentum strategies can lead to prices exceeding a stock's intrinsic value, making them unsustainable.

Successfully implementing a momentum investing strategy requires careful timing. Entering or exiting a position at the wrong time can significantly impact profits. Investors must also be prepared to monitor global events and react quickly to price changes. The interconnectedness of global equity markets means that events around the world can influence stock prices.

BNN's Perspective:

Momentum investing can be a potentially lucrative strategy, but it's crucial to approach it with caution. The inherent volatility and reliance on market trends make it a high-risk endeavor. Investors should thoroughly understand the risks and consider seeking professional guidance before implementing this strategy.

Keywords: momentum investing, trading strategy, stock prices, technical analysis, market timing, short-term price movements, trends, risks, volatility, financial goals, ETFs, exchange-traded funds, investment professional

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