What Is Momentum Trading? Complete Definition, Strategies, and Examples

Momentum Trading Defined

Momentum trading is an investment strategy that aims to profit from the continuation of existing market trends. Traders buy securities that are rising and sell them when they appear to have peaked. The core belief: assets that have been going up tend to continue going up (and vice versa).

The Physics Analogy

Just like a rolling boulder takes significant force to stop or reverse, stocks with strong momentum tend to continue their trajectory. Newton's first law of motion—an object in motion stays in motion—is a useful mental model.

Why Momentum Works

Academic research has consistently found that momentum is one of the strongest and most persistent market anomalies. Explanations include:

• Behavioral biases: Investors underreact to news initially, then overreact as trends become obvious

• Herding: Humans are social—we follow the crowd

• Confirmation loops: Rising prices attract attention, which attracts buyers, which raises prices

• Institutional flows: Large funds enter positions gradually, creating sustained pressure

How Momentum Traders Operate

1. Scan for assets showing momentum (price gains, volume, relative strength)

2. Identify entry points (breakouts, pullbacks to support, etc.)

3. Enter with defined stop loss and target

4. Hold while momentum continues

5. Exit when momentum fades or stops trigger

Time Horizons

Momentum trading spans different timeframes:

• Day trading: Intraday momentum, positions closed by market close

• Swing trading: Multi-day to multi-week trends

• Position trading: Multi-month momentum plays

Key Indicators

• Relative Strength Index (RSI): Measures speed of price changes

• MACD: Shows relationship between moving averages

• Moving Averages: Price vs. 20/50/200-day averages

• Volume: Confirms conviction behind moves

• Relative Strength: Performance vs. benchmark

Tools for Momentum Trading

Modern momentum traders use:

• Stock scanners to find momentum candidates

• Charting platforms for technical analysis

• Social sentiment tools to detect early buzz

• News feeds for catalyst identification

Banana Farmer was built specifically for momentum traders, combining technical momentum signals with social sentiment velocity to identify opportunities early.

Pros and Cons

Advantages

• Can generate quick profits in trending markets

• Works across asset classes (stocks, crypto, forex)

• Clear entry and exit rules possible

Disadvantages

• Requires active monitoring

• Struggles in choppy, trendless markets

• Transaction costs from frequent trading

• Psychological challenges (cutting losers, letting winners run)

Is Momentum Trading Right for You?

Momentum trading suits traders who:

• Have time for active market engagement

• Can make quick decisions under pressure

• Are comfortable cutting losses without hesitation

• Prefer technical analysis over fundamental research

If you prefer set-it-and-forget-it investing, momentum trading probably isn't for you. But if you enjoy active trading and can handle the psychological demands, it offers genuine edge.