I reckon that you have already watched a soccer game.
Have you noticed that prior to the start of the match, the ball just stays still on the field?
Then it would be set in motion after the team, which won the coin toss, should elect that they will start the attack – or kicks it off first.
The ball movement will then remain moving in that direction UNTIL an opposing force will counteract that initial force that the first player provided when he kicked the ball.
Only then will the ball stop – or change direction.
That is an example of Newton’s first law of motion at work.
Why does this matter?
One of the strategies that could be used in gaining an advantage in the world of financial markets – is momentum investing.
It pre-supposes that the price action of a security has a tendency to move in the same direction UNTIL an opposing force acts upon it.
Let us take for example:
A stock price that has been trending up, the assumption is that the stock price will continue to move in that direction (upwards), until acted upon by a considerable selling pressure (supply), wherein it will make the price action to stop going up – and eventually, turn back lower.
The same thing happens on the other direction, if a stock price has been on a downtrend, it is likely that the price action will continue to head lower, until acted upon by a considerable buying pressure (demand), wherein it will make the aforementioned price action to stop heading down – and maybe even, turn up higher.
Momentum trading (or investing) indicates that buying begets more buying and selling begets more selling.
It seems that human nature has similarities with the laws of motion.
And there is an opportunity to take advantage, and profit from that kind of market action.
To begin with…
Trying to incorporate momentum trading in your strategy, you should know the basics of technical analysis.
What is technical analysis, you may ask.
In a nutshell:
Technical analysis is a trading discipline that is used to identify if there are trends or patterns that present an opportunity to profit from the price action.
It assumes that any news or reasons that will make market participants to buy or sell a financial instrument are already reflected in the price and other measurements of activity (i.e. volume of transactions).
Another assumption is that past price action patterns of a security (and the respective outcomes) might be useful indicators of future outcomes – if the pattern is similar.
We can discuss technical analysis, and the tools that could be used – in more detail – in future articles.
How can you actually use this?
We can use this kind of analysis (and the reasoning behind it) as a basis to make informed decisions in our trades.
And here’s the interesting part…
We may also use CFDs (or contracts for differences) as trading instruments.
CFDs are derivatives and they enable us, traders, to speculate and trade that security of our choice REGARDLESS of the direction that it’s currently in.
Because remember that the strategy that we will be employing is momentum-related; we are analyzing the likelihood that the price action of that particular CFD will continue to head in that direction until it stops doing so.
Trading CFDs allow us to go long (we could profit if the price is rising as we may be able to sell higher), or go short (we could profit if the price is declining as we may be able to buy at a lower price what we previously sold at higher prices).
I can’t emphasize enough…
In order to analyze and execute this strategy, we need partners that have our best interests in mind.
Brokers who provide accurate data, offer very competitive spreads, and importantly, who are regulated.
Such industry leaders are Plus500, eToro, and Avatrade. They offer CFD trading for the securities which you are interested in.
Let us look at a couple of securities:
Advanced Micro Devices, Inc. ( ) has been registering new highs this year.
They have been introducing new products, and the price action has been reflective of those developments.
As we can see that, regardless of the time frame you wish to trade in – whether it be year or just a matter of days – we see that trends have been existing – and this offers opportunity for us to profit.
If you’re interested, you may trade AMD CFDs with eToro. Their platform and charting software are easy to understand and navigate around.
Alphabet Inc. ( ) has been offering opportunities for us, traders, to speculate on – with the security’s price action.
There have been periods wherein its price momentum allowed the price action to continue on a certain direction, until it stopped doing so, then headed the other way.
The behavior of the price action is interesting, isn’t it?
You may also choose Plus500 as your broker-partner if you wish to trade Google CFDs.
It is a rather intuitive and user-friendly platform where you could see the chart and execute your trade on the same screen!
These industry leaders have your best interests in mind, because not only do they offer simple yet thorough platforms, they also have risk-management tools at hand (such as stop-loss orders, narrow spreads, etc.).
It is very important to also focus on how we manage our risk as the future is very uncertain.
What’s the real story?
Don’t be left behind.
Let us use the tools and analyze the markets using the concepts behind momentum trading, in order for us to be able to gain an advantage in the competitive world of CFD trading.
Let me end this introduction by reminding you to ALWAYS manage your risk.