Momentum Trading - A 21st Century Stock Trading Strategy

Electronic trading has changed the way the markets behave. In the past buy and hold was the best investing style. You only needed to buy a few good stocks and hold them for a period like six months to a few years and you would make a good capital gain. Buy and hold investor has a long term time horizon. A rising tide lifts all the boats. So when the stock market is in a long term uptrend, all stock prices appreciate. This was the case in the last few decades. Stock market in US has been in a long term uptrend for the last four decades that started from 1950s.

But this may not be the case now. With the advent of the internet and electronic trading, investors become day traders. Long term investing was quickly replaced with short term trading. Everyone got interested in making a quick killing in the stock market. This increased volatility in the market. Market started showing more gyrations in the stock prices. People would start buying on rumours and the prices would suddenly shoot up. Then all of a sudden selling would start. Everyone would be selling now! Electronic trading may be responsible for the stock market crash of 2008!

What we are witnessing is a new stock market. Call it the stock market of 21st century. Days of buy and hold maybe over forever. Investors are now more interested in short term gains. Many people want to make a living like day traders.

In the new stock market, momentum trading will be the name of the game. Investors will be looking for those power stocks that have momentum and are about to breakout and make a monster move in the market. If they can time their trades, they can make astounding gains like 100%, 200%, 300% or even 400% in a matter of few weeks or months. The most important thing in momentum trading is the right stock and proper timing because whatever goes up eventually comes down!