Can Momentum Shift Your Portfolio Decisions?

Back in high school physics, you probably heard Newton’s first law summarized as an object in motion stays in motion. For investors, this scientific law represents the core principle of a trading strategy known as momentum investing. Where conventional investment wisdom recommends buying low and selling high, momentum investors generally buy high and hope to sell even higher.

“At a glance, buying winners and selling losers seems like a simple concept,” said Brian Bachelier, vice president of active trader strategy at Scottrade. “But momentum investing relies on watching short, intermediate and longer market trends with an exit strategy in mind.”

Trend vs. Momentum

When considering a momentum investment strategy, it’s important to distinguish between trend and momentum in the market. These terms can appear to be used interchangeably, but actually refer to different elements of movement.

Trend describes sustained directional movement – an uptrend or downtrend in a specific industry, sector or across the entire market. Momentum defines the rate of speed for that trend.

A momentum trader looks to identify an emerging trend and ride the wave of its momentum. When momentum slows, the position is sold before any correction hits and the wave breaks.

Trends don’t always align, so momentum traders have to determine where to concentrate their activity. For example, media coverage can greatly influence short-term trends. The resulting volatility may exceed risk appetites of many traders. In general, trading with a trend can be much more forgiving than being positioned against it and fighting overall market momentum.

Tools for Trendspotting in ScottradeELITE®

Whether you want to build your momentum trading strategy from the ground up or drill down from broader market insights, ScottradeELITE® features 2 choices to help guide your research efforts.

1.       The Recognia® suite of screening tools filters stocks that exhibit upward price movement. Traders can use the results as a starting point to evaluate opportunities on an individual security level or across the overall market.

2.       The Sector Trends tool uses a proprietary formula to measure momentum across the market. From there, traders can refine their search based on sector, industry and individual stocks. Momentum data is distilled into a simple, color-coded bar graph.

“Every trader will have a unique entry and exit point for their strategy,” Bachelier said. “Keep an open mind and let your research guide you to the next opportunity.”

Question: What tools do you use to take advantage of momentum in the market?

Next Step: Scottrade® clients can log in and review sector ETFs and mutual funds for their portfolio. Not a client? Visit our Quotes & Research page to preview our analytic tools.  

Scottrade and Recognia are not affiliated. The information provided is for educational purposes only and Scottrade is not responsible for statements, offers, or products issued by Recognia. Scottrade assumes no responsibility for the accuracy, completeness or timeliness of the data. No information presented constitutes a recommendation by Scottrade or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy. Please research any product or service carefully before investing.

The content provided is for informational and/or educational purposes only and should not be considered a recommendation or an endorsement of any specific investment strategy. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives.  You are fully responsible for your investment decisions.

Investors should consider the investment objectives, risks, charges and expenses of a mutual fund before investing. Mutual funds are subject to market fluctuation, including the potential for loss of principal. A prospectus contains this and other information about the fund and may be ordered through www.scottrade.com or through a Scottrade branch office. The prospectus should be read carefully before investing.

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