Momentum trading is a technique in which retail/amateur traders buy and sell according to the strength of recent price trends. Momentum traders bet that an asset price that is moving strongly in a given direction will continue to move in that direction until the trend loses strength.
Momentum trading was taken to the next level by Richard Driehaus who used the strategy to run his funds. His philosophy was that more money could be made by “buying high and selling higher” than by “buying low and selling high”. Driehaus believed in selling the losers and letting the winners ride, while re-investing the money from the losers in other stocks that were beginning to boil. Many of the techniques he used became the basics of what is now called momentum investing. Driehaus is one of the rare “smart money” investors who used a usually retail/amateur dominated trading strategy.
Momentum investing works best in a bull market because investors tend to FOMO and herd trade a lot more. In a bear market, the margin for profit on momentum investing shrinks in accordance with increased volatile and investor caution.<< Back to Glossary Index