How to compose a Momentum Portfolio

Momentum investing is the riskiest of the investing styles discussed in this chapter. Momentum investors look for stocks that are moving up in price, buy them, and settle in for the ride. The time to sell is when a stock’s price peaks (before it begins to fall). This definition implies perfect timing on two accounts: The first is to correctly identify stock prices with an upward trend, and the second is to recognize when the stock is trading at or near its peak price. In fact, many momentum investors will continue to buy a stock at its new high price because that is a sign that the stock has broken through a resistance level and will continue to rise in price.

A momentum style of investing is fraught with risk. Buying a stock at its 52-week high price, which then declines in price, will result in a loss of principal. To minimize the amount of potential losses, momentum investors need to be nimble traders. This style of investing favors market timing and a short time horizon for holding a stock. Profits from this style of investing depend on the accuracy of the investor’s decisions on when to buy and when to sell. Profits from this style of investing have the potential to be greater than from the other styles of investing when these decisions are accurate.

Momentum investors are more likely to rely on technical analysis to spot upward price trends.

How to Select a Momentum-Driven Investment Portfolio

Table 13-6
Momentum Stocks


The stocks listed in Table 13–6 were selected based on their chart patterns and whether their stock prices had upward trends. Screening stocks with these upward trends for good fundamental factors, such as increasing sales and earnings, can reduce some risk. Another tool is to assess the money flows into the stocks. Stocks with accumulation of money flows indicate that there are more buyers than sellers, whereas stocks with more sellers than buyers indicate that the price of the stock is headed south. Look for reasons why a particular stock is rising in price. If you can’t find any reasons for the momentum, you probably don’t want to buy the stock.

Lack of Trading Plan
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Using too much Leverage
Determining the proper capital requirements for trading is a difficult task

Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure

Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader

Useful Advices to Beginning Trader
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All about Stocks
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Forex Glossary
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