In simpler words, momentum trading is largely influenced by the concept that a winning stock is likely to continue outperforming the losing one over the course of a trading day. These trend-based decisions are largely influenced by the effects of certain incidents or news events on the market volatility or general predictions of the stock market. However, there are certain misconceptions regarding momentum trading that are likely to cloud your judgment when you are trying to focus on the hot stocks in the market.
Myth 1: Momentum gains are seriously limited by trading costs
While momentum trading might be a higher turnover strategy when compared to the others such as value investing, the average trading costs for the former are pretty low. Despite the fact that most investors are apprehensive of trading costs eating into their returns, most funds today are available at a nominal transaction fee or redemption charges. As a result, momentum gains can easily survive and even overcome trading costs.
Myth 2: Momentum trading is a new concept
Although most investors are led to believe that it is a new concept, momentum trading actually has a longer history than most other forms of trading. There have been authentic records of real world momentum trading since 1980 with some of them having evidence of existence as long as 200 years ago.
Myth 3: Momentum trading is not tax efficient
One of the most common myths regarding momentum trading is that since it incorporates higher turnover strategies, it will inevitably equate to higher taxes. On the flip-side, momentum trading can actually be tax advantageous to the investor! This is because the momentum traders hold on to the fast moving stocks and sell the under-performers, thus compromising short-term capital gains for long term capital gains which in comparison are more efficient in lowering the tax burden.
Myth 4: Momentum trading is too volatile to rely on
Just like other investment strategies, momentum trading too has seen its dark days and cannot always be the best performing strategy in the market. However, the occasional losses are certainly not indicative of the overall strength and health of the momentum trading strategy.
Studies indicate that momentum trading is an effective strategy that has worked fairly well across different asset classes and markets and is worthwhile of being incorporated in your regular investment strategies.
If you want to learn how to day trade momentum stocks you can check out Ross Cameron's website at Warriortrading.com. Ross Cameron is a real profitable day trader who truly knows how these stocks behave, he's been trading the stock market for years now and already helped 100s of students achieve their financial freedom through day trading 2 hours a day.