JumpOff said:
I've been a member of this board for almost a year, and I am still wondering, why is "momentum trading" bandied about as if it were an insult? Except for those who are purely fundamental traders, aren't we all momentum traders? I mean, in order for a trader to make money, then market has to move, and when the move is slowing, most traders (even fundamental traders) take a moment to evaluate their profit targets, and to decide if they will close all or part of their position, or consider adding on.
This is true no matter what time frame we trade in. Yet I often hear "short term momemtum trading" as though it were something different than long term trading. Aren't the charts fractal in their nature? I realise there are higher transactions costs as a percentage of short term trading, but in a modern electronic market - the transaction costs are so low that successful traders should have no problem calculating this into their cost of doing business.
Penny for your thoughts!
JO
This might be a very promising thread, JO.
Let's hope we can have some intelligent exchange of thoughts without the usual degeneration and personal attack nonsense.
Yes, there is a certain self-righteous element which thinks momentum trading,(MT), is something to sneer at and deprecate. Those people are either failures at it or don't understand it. They regard it as "impure". A sort of snobbery. Something to smile at.
As you obviously understand, in most trading and investing, except some options strategies, movement is a pre-requisite of success. Momentum can be regarded as on going movement. It is not acceleration.
Now that definition can be debated, but what is absolute is that movement properly read and traded produces profits in whatever timeframe. I do not use any momentum indicators. In my view the reading of price and its movement and the behaviour of market participants is all. Volume is secondary, though often a useful adjunct.
I find little to disagree with in your post, JO, though I would say that investing using FA only still requires momentum (on going movement) to be profitable, even if that momentum presents as a series of fits and starts.
The only other thing where my personal view differs from yours is that although the accepted view is that charts are fractal, in the day to day business of trading some patterns work better in different time frames. I mean patterns and indicators. Those widely used indicators are, imho, not great ways of trading. Not useless, just inadequate. What matters is understanding what is happening in the market, not necessarily the "why", though intellectually that is preferable, but the "how" and the mechanisms to profit from those moves.
The ability to see momentum developing before or as it starts and to see its demise within a certain time scale before it appears on a chart, provides one of the main ways I trade and earn my living.
For me, momentum = movement = profits.
Trading on momentum means that most of the time the trade goes into immediate profit and that provides the cushion which prevents losses the vast majority of the time - provided exits are timely and the position is actively managed. That active management means not only that losses are infrequent but that the extraction of profits from on going momentum trades is maximised very efficiently.
A reasonable analogy is the cable car system in San Fran. When you jump on as it starts moving and momentum builds, you know it's pretty unlikely it's about to stop and reverse. As in plunges down a steep hill and the operator pulls on that magnificent old lever brake, what do you do as it slows to a halt, you jump off. Don't you, Jump Off ?
Reading the future not required.
I'll tell you something else. There is a beauty, a purity, in trading on momentum. And it's much more of a sudden and a frequent pleasure than the pleasure of investing purely on fundamentals and being profitable.
Something else. It's like a force multiplier. A ground attack fighter that carries two air to surface missiles is fine. But one which carries eight missiles, returns to base and can turn around and be airborne again very quickly is far more effective.
Momentum trading is very similar, you don't have to sit around with your assets tied up whilst nothing is happening and you can gear your capital four fold if you wish.
As you say, commission costs are very small. You can trade 1000 shares of RIMM - a position with a nominal size of $70,000 for a total commission of $15. For that you need only $17,500 (under £10000) in your account. Once out of the trade you simply keep on re-using your capital.
You don't have $70,000 "at risk" in such a day trade. Your trading methodology might permit a maximum "risk" of 15c or $150 or 30c or $300. Not $70000.
That's really what momentum trading is all about for me.
Richard
