Would you like to make 10 percent a month? How about 25% a month? I am sure you would. In fact, most of us would. The good news is that you can make such returns if only you made certain adjustments to your trading style. A nice solid 25% a month is possible if you do the following: trade only one stock, pick a volatile stock, have a big enough margin account, and, most importantly, trade on momentum.
This article will focus on the last element since it truly is the make or break element of a high-stakes momentum trading strategy. You would have to adjust how you think about the stock market in order to do well with momentum trading since it flies in the face of how you were taught to trade in stock.
The classical model
The classical model of stock trading is that you buy based on fundamentals. This means you focus on how much market share the company has, how good its leadership is, and how good its products and services are. Fundamentals look at the intrinsic value of the company and what it has to offer and whether it has the basic elements, or fundamentals, to stick around a long time and do well. There is nothing wrong with this model.
In fact, many investors use this to great profitability. The downside is that you have to wait for a long time to make money. Some great stocks take years to fully soar Others are already soaring to new height but they might seem intimidating since they seem ‘overpriced’ now.
The momentum model
Unlike the classical model which focused on the actual company you are trading on, the momentum model doesn’t care about the underlying stock. Instead, the momentum model focuses on the up and down movement of the stock. Its goal is to make money in the daily gyrations and unexpected moves of a stock.
The key is to make a percentage gain here and there based on the daily up and down motions of the stock. By eking out a percentage here or half a percentage there, the momentum model, at least for the short term, makes quick gains. You can ride the momentum model based on long buys or on short sales.
Ideally, if the stock you are trading has enough volatility, you can do several cycles of buying, selling, and sell-short and earn with each cycle.