Investing in the stock market is often related to riding a roller coaster. There are climbs to the tops that inevitably lead to a downward drop. Our adrenaline will spike out of fear or excitement as we go up and down. Capitalizing on the rides up and drops is exactly the goal of momentum investing.
The principles of momentum investing are quite simple. As the roller coaster goes up, we buy the stock to capitalize on the appreciation. When we reach a point before the drop, we can short the stock to make money off the downward trend. Then repeat. However, it's not always that simple.
Determining when to buy or sell, called entry and exit points, is the most important aspect of the momentum investing strategy. Strong entry and exit points may lead to stronger returns. To help investors make this difficult decision easier, they can use indicators and technical analysis to discover when to jump on the ride.
Momentum investing is not a widely used strategy due to its less predictable results. Succeeding using this strategy requires a high level of time commitment and experience to accomplish. Earnings profits will only come if an investor is able to get in and out at suitable times. If an investor fails to, it could lead to large losses.