The best magazine
But if the trend is moving quickly, you want to know that so that you can get ahead of it.
If the rate of change of the trend is going up, rising prices are going to follow quickly.
What we have been talking about is Momentum! Just like high school physics, momentum is the rate of change and is calculated by dividing the closing price today by the closing price ten days back and multiplying it by hundred.
This gives you the momentum indicator.
If the prices didn't go anywhere momentum indicator will be 100.
If the prices went up, the momentum indicator will be greater than 100 and the prices went down, the momentum indicator will be less than 100.
Now, a trend is expected to continue if the momentum indicator is greater than 100.
Momentum is a leading indicator.
It tells you what is likely to happen in the future not what happened in the past.
Momentum trading is done with some attention to the fundamentals.
When key business fundamentals like the sales or profits are accelerating at the same time the security price is going up, momentum is likely to continue.
Now, investors can also use momentum in their investing decisions.
Momentum investors are looking for securities that are rising in prices especially if accompanies by acceleration in the underlying growth.
The knock on momentum investing is that instead of buying low and selling high, your goal is to buy high and sell even higher.
So when you are doing momentum investing, you are looking for a security or a stock that has a potential to move big.
How long this big move might take to materialize? Well, the expectation is for the big move to happen in a few weeks to a few months.
Just like in ordinary physics, when a ball is set in motion, it will continue moving unless stopped.
This is what the Newton's First Law says.
You can expect a security price to keep on rising as long as something drastic doesn't happen to stop that rise.
So what can be that something drastic? It can be a sudden breaking news about the misdoings of the management that have not been known to the public before.
I am just giving you one example.
There can be more.
So before you do your momentum investing, it is always better to do some fundamental research on the company.
Remember the Dot Com Bubble that burst and hurt many people a decade back.
Lot of people were doing momentum investing without doing fundamental research on the stocks that they were investing in.
So you need to do some fundamental research as well to ascertain that the rise in prices of a stock are sustainable over the long haul or not.
Now just like price momentum that we have been talking about above, we can calculate the earnings momentum.
Earning momentum is the province of the investors.
The investor looks at the quarterly earnings of the company to see if it is going up at a faster pace say from a steady pace of 10% a year to 12% or 15% and so on.
If the earnings growth rate is going up what this means is that the underlying price is also going to accelerate.
Source: ...