Momentum Trap (DVM) execution history (2024)

FAQs

What is a momentum trap? ›

Momentum Trap stocks are those with low durability scores, expensive valuation, but high momentum. These stocks are risky bets that investors may be drawn to due to changes in share price. They however do not necessarily justify existing valuations and share price gains. Click to see classifications.

Momentum trading is a strategy that aims to capitalize on the continuance of existing trends in the market. Momentum traders usually buy or sell an asset moving intensely in one direction and exiting when this movement shows signs of reversing. They also seek to avoid buying or selling assets that are moving sideways.

Reversal normally occurs in the long run over two to five years3, whereas momentum takes place in a short time frame of one year or less.

In most momentum strategies, traders are only looking to benefit from the body of a trend. In scalping momentum strategies, the individual is trying to enter ahead of momentum, entering a move at the start and closing the position before the momentum dissipates.

The bottom line on momentum trading is that it is a higher-risk way to put money to work in the stock market. And it's certainly a form of trading, not investing. Momentum trading can be a good way to make money when things work out, but it can quickly result in big losses if things go the other way.

Momentum investing is a trading strategy in which investors buy securities that are rising and sell them when they look to have peaked. The goal is to work with volatility by finding buying opportunities in short-term uptrends and then sell when the securities start to lose momentum.

The investing principle was made popular by Richard Driehaus, who is also known as the father of momentum investing. According to him, one can make far more money by buying high and selling at even higher prices instead of looking for undervalued securities.

There are lucrative profits to be made from momentum investing. For example, say you buy a stock that grows from $50 to $75 based upon an overly positive analyst report. You then sell at a profit of 50% before the stock price corrects itself.

Once the momentum portfolio stocks are identified, the idea is to buy all the momentum stocks in equal proportion. So if the capital available is Rs. 200,000/- and there are 12 stocks, the idea is to buy Rs. 16,666/- worth of each stock (200,000/12).

This may raise the question whether it is a secure service provider. Immediate Momentum is not a trusted broker because it is not regulated by a financial authority with strict standards. We recommend you open an account only with brokers that are overseen by a top-tier and stringent regulator.

Is momentum investing good? ›

Investors who practice momentum investing are not discouraged by a high price or by the fact that the price of a stock is rising. On the contrary, these investors are actually attracted to a company whose price is on an upward trajectory.