Momentum buying and selling is predicated across the logic that if a predominant development is already seen out there, then that development is plausibly going to proceed not less than till indicators start to return in that it has ended.
The thought with momentum buying and selling is that if a sure asset has been transferring primarily in a single course for, say, a number of months, then we are able to safely assume this development will proceed, not less than till knowledge begins to point out in any other case. Subsequently, the plan shall be to purchase on each dip and lock in income on each pump, or vice versa if shorting. After all, merchants want to concentrate on when a market reveals indicators of development reversals, or else this identical technique might start to show round fairly quick.
It must also be famous that merchants shouldn’t set methods that attempt to purchase and promote on the precise lows and highs, or what known as “catching the knife,” however reasonably lock in income and purchase again in at ranges which might be fairly secure. Algorithmic buying and selling is right for this, as customers can merely set percentages they really feel comfy with and let the code do the remaining. This system by itself, nonetheless, will be ineffective if a market is transferring sideways or so unstable {that a} clear development has not emerged.
One glorious indicator for watching developments is transferring averages. Simply as they sound, a transferring common is a line on a worth chart that reveals the common worth for an asset over x quantity of days (or hours, weeks, months, and many others.). Typically, quantities like 50, 100 or 200 are used, however totally different methods take a look at totally different time durations to be able to make their commerce predictions.
Typically, a development is considered robust when it stays properly above or beneath a transferring common — and weak when it approaches or crosses over the MA line. As well as, MAs based mostly upon longer time durations are usually given much more weight than one which solely watches, say, the final 100 hours or an identical timeframe.
