Let us begin with what momentum is and how is it used as a reference in trading.
Momentum as it is:
In middle school, we were taught about moving bodies and how they pick up the pace. Think about the train. When the engine starts, the train starts moving and it gradually increases its pace.
Initially, the rise in acceleration is very slow but after a point of time, the acceleration stops and th train begins to move with a constant velocity. When the trip is about to end, the train starts slowing down. Now this process where ti slows down before coming to a complete halt, can stretch up to miles.
Momentum in trading:
If we think of all this in trading terms, the best part of the journey is when it is in the middle, when the train is moving at the highest velocity. Momentum investors are very much interested in performance and they tend to chase it.
The basic mindset behind the strategy is to achieve an alpha return by investing in the trending, no matter where they are going. Such investors have to make money and or, it does not matter if the stock is going up or down. What’s important, is the speed with which the stock is moving.
Momentum investors use this technique so that they can make a profit out of a particular behaviour called herding behaviour. This type of trait is generally followed by market psychology.
The momentum investors look at trading in a different way. Where most of the traders look at it like buy low, sell high, momentum traders follow buy high, sell higher”.
Once the acceleration in the stock price is obvious to the eye of momentum trader, the trader will take a short or a long position in the hopes of fact this particular momentum will continue in the anticipated direction.
More about momentum trading:
This particular strategy is dependent on the movement in short term rather than the fundamentals of the company. After applying this strategy, the investor can make money depending on the strength of a trend that the involved asset is following.
When momentum traders are selling, they tend to sell low and buy lower. Rather than wasting the time in identifying the reversal pattern of a trend, these investors look out for a trend that has been recently created due to a fresh price break.
The thing with momentum trading is that the trader has to keep in mind that there will more than half of the trades will go wrong.
Also, this type of trading can help a trader in crisis because it takes less than an hour every day to make a decent amount of money if the trader is not complicating things and following the price.
Apart from this, momentum trading requires a decent amount of capital because one of the oldest and the most sought out momentum trading asset is the future’s contracts. Mot many technical tools are required for this strategy, only the basic type of charts and indicators.
Now let us address the elephant in the room, momentum trading in the pre-market.
Let us first look at what a pre-market is:
After hours and the pre-market are the two sessions that happen after the “main” intraday trading session. Technically, both of these sessions are separated by an eight-hour dead period.
During this time, no trading occurs.
The pre-market time is between 4 AM and the after-hours run from 4 PM to 9:30 PM. After hours run from 4 PM to 8 PM. It is hard to differentiate between these two types of hours because they have the same investors who share similar liquidity profiles. Both of these markets respond well to an announcement made in between and most of the volatility in price action occurs during this.
Difference between regular and pre-market trading:
Since a few investors trade during the premarket hours, the competition is stiff. There are professional traders who always have more information than individual investors, which put the latter at a backfoot in terms of profits.
The difference in the ECN compatibility of two different investors can interrupt the execution of a trade. Also, a system delay at the broker’s end can deaccelerate the trade or even stop it altogether.
Put in simple terms, premarket trading and regular trading both have different trading rules. Since there is a slight possibility that two traders have the same broker or even the same ECN, there is an increased possibility that both the firms will react different in terms of the rules of premarket trading, the trader is advised to look at and then compare them for further nuances.
The trading firms that operate in premarket trading, often work around the stop losses. When a limit order is placed, the trades are executed only when the price of the stock reaches the price limit or exceeds the same.
Pre-market trading also works around Time limits.
These orders can be cancelled if they are not executed in the pre-market trading hours and can be executed when regular trading hours begin.
Data collection:
For data collection, a python library called Ramaroussi’s Yahoo! Finance Python library can be used. There can be various libraries but this one is the most relevant and sought after. For each security, ideally, there should be at least 5 years of historic data that should be present. The metadata can be optimised by omitting the pre and after-hours price data. This way, data from any source can be made acceptable. This analysis can include the differences between the price action
A component of this analysis contains the price action differences associated with the reporting periods. It is also important that a data source should be identified and that can further identify the reporting period in the sample time.
A viable idea for this can be the SEC’s EDGAR database. Th SEC also offers a free API which is very helpful in fetching the relevant results.
Are you looking for a broker that can help you in momentum trading? Your search ends here because we present you with the mighty broker HFTrading. The broker has been active in the markets of Australia and New Zealand for a long time.
The financial service provider is regulated by the Australian securities and exchange commission. HFTrading offers three main trading accounts to its traders.
Namely, the sliver, platinum and gold. All the accounts are designed by keeping the level of expertise the trader has. From a veteran to a novice, the broker can satisfy each and every one of them in trading terms.
Also, HFTrading offers one of the best leverage and spread conditions that are out of the competition. The broker has a strict no-no policy for commission-based trades. This policy comes a boon to the day traders as they make their money off of volume trades with a profit margin that is less.
Bottom Line:
Momentum trading is good for people who can keep their emotions aside for a while and completely concentrate on the market and how it is moving. Sometimes, a falling market is also moving with a lot of money-making opportunities. Always remember, math is what puts the money on the table, not emotions. Ignore it and you will find yourself in an inevitable loss position. Focus on it and money will incur.
Hi am alexander james