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Momentum based Algo trading is turning out to be profitable strategy January 06 2021Momentum trading, Momentum Algo trading, Momentum

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Gist of Momentum based trading

Owing to the own rationale that says "buy high and sell higher," momentum investing is a fascinating tactic. Investing based on momentum sounds less like an investment plan and more like a mind-boggling response to information about the market. Selling losers and purchasing winners is the principle of momentum trading. In clear terms, investing in momentum is a trading tactic in which investors purchase and sell shares that grow as they appear to be at their highest. The goal is to exploit the volatility by finding buying opportunities to buy rising securities in short term and sell them when they start to lose momentum.   The investors take the cash and start looking and repeating the same process for the next short-term uptrend or purchasing opportunities. Professional traders have a good knowledge of securities that lets them know when to reach a position, how long to keep it, and when to sell it. They also have great presence to short-term news driven changes or selloffs.

Driehaus Capital Management was founded by Richard Driehaus, one of the founders of momentum trading techniques, and reportedly delivered 30 percent compound returns in the first 12 years after its inception. He took this method and converted it into a technique used by him to run his funds. His theory was simple: "Buying high and selling higher" would make more money rather than the dull thought of buying underpriced stocks and waiting for them to be re-evaluated by the market. From 212 years of US equity results, the success of the momentum strategy is indeed evident. Driehaus believes in selling the losers and having the winners to lead while re-investing the losers'' money in other stocks that seemed to be boiling.

Algorithmic Trading Strategies – The Complete Guide

Types of momentum trading

Momentum is present in multiple types of assets and throughout geographies. You can deal in two ways by using momentum, namely—

1 Time series momentum.

2 Cross-sectional momentum.

Time series momentum-

If the past returns and performance of the securities are positively related to its future performance then its known as time-series momentum.

Cross-sectional momentum.

 Cross-sectional momentum is based on price trends between different markets or securities in cross-section. Cross-section momentum looks at the relative strength of a cross-section of markets. It is ranked based on their relative strength momentum to determine which markets or stocks have gained more and which have gained less.

Key points to keep in mind while going for momentum trading

· Do not look upon leveraged or inverse ETF’s because their price swings fail to accurately track underlying indices or futures market due to complex fund construction.  

· Seek out for securities that trade more than 5 million shares per day.

· Keep an eye on “flavor of the day’ when new products, diversions or concepts capture the public’s imagination.

· Bio-techs and small to midsize technology companies create a tremendous supply of these story stocks.

Actions to avoid while momentum trading

· Jumping into position too soon, before a momentum move is confirmed.

· Failing to keep eyes on the screen, missing change in the trends, reversals or signs of news that take the market by surprise.

· Closing the position too late, after saturation has been reached.

· Keeping a position open overnight. Stocks are particularly susceptible to external factors occurring after the close of that day’s trading-these factors could cause radically different prices and patterns the next day.

· Failing to act quickly to close a bad position, thereby riding the momentum train the wrong way down the tracks. 

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