What in the world are momentum traders?
This is the question on which the majority of people would and will fail to answer. In the ever-changing world of different exchange markets and the plethora of the traders, who among them considers themselves as a momentum trader? Well, the answer is not as simple as you might think. The basic answer to the question is indeed simple. But to convey the full explanation that is understandable by everyone is a task that requires a bit more extensive article.
So, who are those momentum jumpers?
Yes, jumpers. Why, because they jump on the momentum of the trade. A trader like this will wait for the obvious signs of an acceleration of the price movement, and they will buy in on the deal, taking the position they find favorable. The speed of the movement determines the extent of the return these people make.
Mental discipline is one of the primary requirements for this kind of exchange. The trader has to wait for the price to reach the certain speed to jump on it. Failure to wait might backfire as the movement may slow down or draw to a halt. We can recognize two types of momentum jumpers:
- The event-based momentum trader will jump on the deal that follows a large event that will obviously have an effect on the certain stock. The volatility of the market becomes very high after the release of the news (the event). That increased volatility may last for several hours, and during those hours the price goes up and down in uncontrolled patterns. This is the right trading environment for this type of trader. In those several hours, he invests in the asset numerous times, changing the calls as the price goes.
- Technical-based traders base their investment on the expectations versus reality on the market. They use the reasoning that the prices of the stock don’t reflect the true value of the same. They buy or sell the stock and wait for the price to reach its real value.
Some basic momentum strategies
A large number of these trades happen within an hour, and it is hard to keep the greed out of the way. Inexperienced players fail to make a profit simply because they don’t know when to pull out of the trade. Evading the saturation point is something every trader will have to learn if they want to earn money with this type of business.
An experienced momentum jumper will work only two hours per day, the beginning hour of the trading and the closing hour. The increased volatility at these times allows the trader to increase the amount of potential return. One of the basic rules of momentum trading is to close every trade, no matter whether it closes on the loss.
Other exchanges have their momentum traders as well. Even in the binary options trading and its big brokers you can find momentum investors just click here. They keep on buying options with the same underlying asset, only changing their calls according to the changes in the price movement.