The Momo Trading Strategy

The Momo Trading Strategy
TradeGM Analysis date_range April 13th, 2021

MOMO stands for momentum, which, in the world of finance, reflects the aggressiveness of the market. Momo is also known as the 5-minute Trading Strategy, and more than ever before, it is becoming highly popular.  

It is a trading strategy that derives its principles from Newton’s law of motion. According to Newton, an object will remain at rest or continue to move at a constant velocity unless it is influenced by external forces. He additionally said that the momentum of the object is directly proportional to the force applied.  

If we apply those principles to the financial markets, we will see that they are also influenced by external forces and that they will move proportionally to the force applied. In this case, traders are the external force. They wait for the right market conditions, and then they push financial security in the desired direction, creating a strong positive momentum that makes other traders want to buy the security. This, in turn, creates momentum.  

In other words, the initial trader has profited from creating momentum around specific security. For example, let’s say the financial security was stock that was worth $1 dollar per share when he began to push it. As the positive momentum rose, so did the stock price. In the end, the stock that was worth $1 is now worth $1.50, meaning that the initial trader has made a profit of $0.50 per share. 

Momentum (Momo) Trading Indicators 

Momentum indicators are tools that show the movement of the asset’s price over time and the solidity of the movement, irrespective of the direction. They are essential to momo traders as they can help identify the points where a particular stock can reverse. Although many traders choose to rely on volume and price to measure the momentum, there are several indicators that can be used. Some of the most popular momo trading indicators include: 

Rate of Change (ROC)  

This is a technical indicator that compares the price changes of an asset today with the price of that asset a number of periods ago. It can be used to spot overbought or oversold conditions. It is set against zero, which means that a rising ROC indicates an uptrend, while a falling ROC typically reflects a downtrend.  

Relative Strength Index 

This momentum indicator is similar to ROC in the sense that it, too, compares the current price of an asset to recent price changes. It is designed to measure the magnitude of momentum change to determine whether an asset is overbought or oversold.  

Moving Average Convergence-Divergence (MACD) 

The MACD indicator measures the strength of momentum by using two moving averages of an asset’s price. It is calculated by subtracting the 26-period EMA from the 12-period EMA and using the result as a MACD line.  Then a ‘signal line’ is set on top of the MACD line to show triggers for buy and sell signals. In other words, if the MACD crosses above the signal line, it’s a cue to buy. On the other hand, if the MACD falls below the signal line, it’s a cue to sell or short. 

To sum up 

As opposed to ‘classic’ traders, momo traders use momentum trading strategies to identify strong drives in short timeframes, usually not more than a couple of hours or days. They put all their efforts into a few trades at a time and constantly scan for signals.  

Momo trading can be a good strategy for those who want to capitalize on sharp price changes, however, it is not recommended for risk-averse traders. While momo trading can yield significant gains in short timeframes, it can also result in massive losses in short timeframes. It is beyond important to set up the right hedging strategies when executing trades. 

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.42% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. X