What Is Momentum Trading

Momentum Trading

6 min read

Many people have asked me what momentum trading is and how it differs from other types of trading. I think it’s a great question because momentum trading is a fantastic strategy to add to your trading toolbox. So keep reading to discover what momentum trading is, how it works, and four popular momentum-based indicators you can use to get started.

Have you ever tried surfing? Well, momentum trading is exactly like surfing. You sit on your board, hang out, bob around the ocean, and wait. And wait some more. All of a sudden, you see it coming in the distance. The wave is building rapidly; you snap into action, paddling like a crazy person toward it. For the love of God, you will nail this wave and ride it before the momentum (wave) dies out. 

For those of you who surf, you know the importance of timing; paddle too slow and miss the crest, stand up too fast, and the wave blows over you. And that my friend is momentum trading. 

Summed up, it is a strategy in which you use the strength of price movements to determine your trade entry and exit points.

Those who trade on momentum take advantage of market volatility (i.e., the ocean waves) by entering when prices are going up and selling them as the wave crashes down again. 

What Factors Determine Momentum?

Humor me briefly and think back to your high school physics classes. Do you recall talking about momentum?

Or, where mass multiplied by velocity determines the likelihood that an object will continue on its path? Similarly, trading price momentum is just like momentum in physics. 

However, in financial markets, other factors like trading volume and rate of change determine momentum. As a result, momentum traders go out on a limb and bet that an asset price moving strongly in one direction will continue to move in that direction until the trend loses strength.

Popular Momentum Trading Indicators

Momentum trading indicators show you how quickly the price of a given security is moving in a particular direction. They can also tell us whether the price will likely continue on its current trajectory.

Like a wave that builds and falls, the price movement reaches a maximum peak. After this point, buyers recedes, sellers start selling their positions, and price tends to flatten or reverse in direction.

Below are a few technical trading oscillators commonly used by momentum traders to decide if the time is right to ride the wave. 

Moving averages: Moving averages help you identify trends and momentum using smoothing price lines. Instead of erratic short-term price moves, moving averages give you a nice smooth chart. There’s no size fits all approach to using moving averages; you can use simple or exponential moving averages. 

Relative strength index (RSI): As you can see by the name, RSI measures a trend’s strength. RSI tells us when to enter and exit the market by telling us whether it is overbought, oversold, flat, or range-bound. To calculate RSI, we take the average gain of up periods during a specified time frame divided by the average loss of down periods. More importantly, the resulting number will tell us if a reversal is imminent.

Indicators Continued

Stochastics: What the stochastic oscillator does is compares the current price of an asset with its range. Typically a number below twenty means an upward moment is at hand. Conversely, a number above 80 means a reversal is coming.

Moving average convergence divergence (MACD): This indicator compares fast- and slow-moving EMA trend lines against a signal line. The result is the same: identification of price momentum and reversal point. We consider momentum to be strong when the lines are far apart. The opposite is true for converging lines; momentum is slowing down, and the price will likely move toward a reversal.

On balance volume (OBV): The OBV indicator directly compares trading volume to price. The underlying principle is that price momentum is strong when trading volume rises significantly without a significant price change. Alternatively, we interpret a decrease in volume as a sign of diminishing momentum. 

How Does Momentum Trading Work?

What is momentum trading, and how does it work? It’s like its name suggests. You’re trading the momentum of a stock. For example, if you’re shorting a stock, you want to buy high and sell low. Then buy low and sell high if you’re bullish on the stock. The idea is to get out of stock right before the momentum changes.

One Fantastic Momentum Trading Strategy

Have you heard of the bull flag momentum trading strategy? If not, you’re in luck, as I will tell you all about it.

Bull flags are easy to identify if you know what you’re looking for. Like a flag, bull flags have a pole. Within the pole are several large rising candles and a flag, or a series of small candles moving sideways.

As momentum traders, we look to time our entry before the crest of the wave hits. This “before” period is the series of candles moving sideways. Smart traders don’t buy at the top of the wave when the price is at its peak. Instead, the pros wait to enter as momentum builds. 

AMC Chart
The hourly chart shows that the hourly candles have been ripping above the nine-day exponential moving average from the DAILY time frame. , So yes, we use Trendspider to view how hourly candles react to daily moving averages, and we can spot bull flags and look more closely at where we want to get long or close our trades.

Don’t Chase the Wave

One golden rule all successful traders follow is they don’t chase stocks. Luckily, if you missed the first wave entry, swim around and wait to enter during the next consolidation period.

You can pull the trigger and begin buying when the stock price breaks in the consolidation area. More often than not, a stock will show several consolidation periods. But that doesn’t mean you should enter.

As a rule of thumb, I only enter during the first and second consolidation periods. After that, the price likely has been over-extended for a while now, which means buyers will soon lose control. 

I refuse to enter for fear of momentum and interest waning. However, avoiding trades after the second consolidation is a smart rule, and you’d be wise to adopt it. 

Where to Go From Here?

I highly suggest you invest significant time learning how to use the various momentum indicators. By learning how to spot a momentum change, you can position yourself on the winning side of a trade.

We can’t teach you how to surf, but we can surely teach you how to ride the momentum wave. So please don’t wait any longer; check out our trading courses that teach you how to do that.

Related Articles

stock borrowing

What Is Stock Borrowing?

Many financial instruments can benefit individual or institutional investors in the stock market. As the economic environment changes, certain tendencies become more popular. During strong

Read More »
Best Offshore Brokers

Best Offshore Brokers?

Every day, investors are limited when they want to invest outside their country. Most local financial institutions only offer popular markets such as the US,

Read More »
Short the Rip

Short the Rip

Want to get the most out of your trading routine? Try out the short the rip selling pattern. With proper analysis, concentration, and making use

Read More »

Claim your 100% FREE Trading Courses. This is strictly for people who are hungry  for knowledge. We’ll teach you how to trade!

Rated Best Value by Investopedia


If you’ve looked for trading education elsewhere then you’ll notice that it can be very costly.

We are opposed to charging ridiculous amounts to access experience and quality information. 

That being said, our website is a great resource for traders or investors of all levels to learn about day trading stocks, futures, and options. Swing trading too! 

On our site, you will find thousands of dollars worth of free online trading courses, tutorials, and reviews.

We put all of the tools available to traders to the test and give you first-hand experience in stock trading you won’t find elsewhere.

Our content is packed with the essential knowledge that’s needed to help you to become a successful trader.

It’s important to treat day trading stocks, options, futures, and swing trading like you would with getting a professional degree, a new trade, or starting any new career.

Invest the proper time into your Trading Education and don’t try to run before you learn to crawl. Trading stocks is not a get-rich-quick scheme. It’s not gambling either, though there are people who treat it this way. Don’t be that person! 


The Bullish Bears team focuses on keeping things as simple as possible in our online trading courses and chat rooms. We provide our members with courses of all different trading levels and topics.

If you’re a beginner, intermediate level, or looking for expert trading knowledge…we’ve got you covered. 

We have a basic stock trading course, swing trading course, 2 day trading courses, 2 options courses, 2 candlesticks courses, and broker courses to help you get started. Free.

Just choose the course level that you’re most interested in and get started on the right path now. Become a leader, not a follower. When you’re ready you can join our chat rooms and access our Next Level training library. No rush. We’re here to help.

Click Here to take our free courses.