INSIGHTSMomentum trading is based on the idea that securities that have performed well in the past will continue to do so in the near future, while those that have underperformed will continue their downward trajectory. This approach can apply across various asset classes, including stocks, forex, and commodities.
For instance, if a stock's price rises significantly over a few weeks, a momentum trader may buy it, expecting the upward trend to persist. Conversely, if a currency pair is trending downward, a trader might sell it, anticipating that the bearish movement will continue.
This strategy often relies on technical indicators, such as moving averages or the Relative Strength Index (RSI), to identify potential entry and exit points. Related concepts include trend following and technical analysis, as momentum traders typically utilize price patterns to make informed decisions.