The uncertainty in investing in the stock market can only be managed by having a safe strategy to use for all market conditions. Price action, which theorizes and tracks changes in stock prices, is a “living” concept that no one can predict with complete accuracy. Hence, momentum has become a key factor that investors use when tracking market prices.
Investors who use momentum measure price moves in terms of inertia, being that what moves in one direction is likely to continue doing so for a period of time.
Defining Stock Momentum
Prices are always moving, but the rate at which they move is called momentum. The laws of physics that force your body to lean when a car turns are the same principles that cause prices to stay in one trajectory. Stock investors who rely on momentum use the velocity of prices to indicate how markets will behave in the future.
A Glimpse into Price Action
You can determine the entries and exits of your trades via momentum, but this takes a keen understanding of technical analysis. Technical analysis looks at price charts to measure how prices are actually moving. Here are a few concepts you’ll need to measure momentum with—when forwarding your market analysis via price charts:
Time—Stock charts that show long-term trends help you to put intraday trading into perspective. What might seem like a major move on a 60-second chart, for example, will likely appear as being nothing on an hour chart.
Trends and Patterns—New investors face the risk of falling into traps when they think prices are rising though they’re falling. Price patterns that confirm the rise or fall of prices are called double highs or double lows. The momentum of rising prices, for example, will create new highs, and when consecutive highs are formed, there’s a greater certainty behind the rising prices you see.
Rates of Relativity—“Price relativity” is a theory that expresses how price rallies rarely occur against a predominant trend. Though prices can surely fall after they’ve risen, a complete turnaround isn’t likely to happen in a single move. In essence, today’s price and momentum are based on yesterday’s.