What is momentum trading

Momentum trading definition:

Momentum trading is a system of buying stocks that have had high return over the past three to one year, and selling those that have had poor return over same period.

In momentum trading while no consensus exists about the validity of this strategy, economists have trouble reconciling this phenomenon, using the efficient market hypothesis.

Momentum trading strategies often involve disprortionately trading in stocks with high bid ask spreads and so it is important to take transactions cost into account When evaluating momentum profitability.

The existence of momentum trading is a market anomaly, which finance theory struggles to explain. The difficulty is that an increase in assets price, in and of itself, should not warrant further increase

Ideas Behind momentum trading 

Momentum trading is based on the
empirical observation that there is persistence in an assets performance. An assets that has performed well in the past tends to perform well in the future, and an asset that has performed poorly in the future.

Types of momentum trading:

1. Cross sectional momentum trading 
2. Time series momentum trading 

• Cross sectional momentum trading:

This type of of momentum trading has received that past attention in the literature and is often applied to stocks.

• Time series momentum trading:

In time series momentum trading examines an assets past return without considering the past return of othe assets.

Requirements for success as a momentum trader:

In momentum trading trader require high level of focous and attention. They must remain steadfast when they have caught a bit of momentum in the right direction but target has yet to be reached. In this ways, these traders exercise huge degrees of discipline.