Momentum Investing: How to Trade Stocks Riding Strong Trends

Momentum investing involves buying stocks or securities that are showing a sustained upward price trend, often based on their performance over the previous three to twelve months. Investors typically sell when signs show that the upward momentum is weakening. In a bear market, the same approach can involve short-selling securities that are already declining, based on the expectation that the downtrend may continue. Rather than focusing mainly on a company’s operations or financial results, momentum investors use technical indicators such as trend lines, moving averages and the Average Directional Index (ADX) to identify the direction and strength of a trend. However, economists and analysts still disagree on how consistently effective the strategy is.

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