Momentum Trading

Momentum trading takes the continuation of an existing move as the setup. The evidence is the move itself: a sequence of closes in one direction, a breakout that is extending, a relative-strength leader, a bar that closes at its extreme on heavy activity. The trader is not trying to buy the low. The trader is trying to be in the market while the imbalance persists and out when it does not. Momentum is a description of the recent path, not the oscillator of that name, though the oscillator can be one way to measure it. The risk is the air-pocket. Moves that are fast reverse fast, and the entry is often far from any obvious invalidation.

Define momentum so you cannot fudge it. New highs over N bars, a close in the top tenth of the range on volume, relative strength above a threshold against the index. Then define the stall: a close back under the breakout, a break of the last higher low, a momentum measure crossing back through its midline. Without the stall rule, momentum trading becomes "hold the thing that is up," and the exit is the crash. Size smaller than you would on a pullback entry, because the stop is wider or the slippage is worse. Chasing and sizing as if you had bought the pullback is how the first sharp dip does disproportionate damage.

Use momentum entries in markets that are actually trending and stand aside in ranges, where the fastest bar of the day is usually a trap. Prefer instruments with real liquidity so the exit on a stall is available. Take partial profits into extensions. A momentum trade that you cannot exit is not momentum. It is inventory. Combine with relative strength if you are choosing among names: the one that is moving more than the index, not the one with the prettiest candle. When the leaders stop leading, the strategy is off, even if your watchlist is still familiar.

Confusing a single large bar with a momentum regime. Also holding through the stall because the story is unchanged. The strategy is about the move, and the move stopped. And buying every gap up. A gap is a momentum clue only if the prior trend and the opening drive agree. A gap in a downtrend is often the exit of a short squeeze, not the start of a long.

Momentum is regime-dependent. It gives back a lot of open profit at the turn, and the turn is the trade you will remember. Transaction costs are higher because you enter when the spread is being paid by everyone. Backtests of "buy the strongest decile" are not the same as a discretionary chase of the strongest bar. If you trade the discretionary version, judge that version. Do not borrow the backtest of the systematic one.