Reviewed by Gotrade Internal Analyst
Some investors look for undervalued stocks. Others focus on income. Momentum investing takes a different approach. It is based on the idea that assets that have performed well recently tend to continue performing well for a period of time.
Momentum investing is widely used by traders and also appears in many systematic and factor based strategies. Understanding how it works helps investors decide whether this style fits their goals and risk tolerance.
This guide explains what momentum investing is, how it works, and why it attracts both supporters and critics.
What Is Momentum Investing?
Momentum investing is a strategy that involves buying assets that have shown strong recent performance and selling those with weak performance.
In simple terms, it means investing in what is already moving.
Momentum investing is based on observed market behavior rather than valuation. It assumes that trends can persist due to investor behavior, institutional flows, and gradual information diffusion.
How Does Momentum Investing Work?
Momentum strategies follow clear rules to identify and ride trends.
1. Identify recent winners
Momentum investors look for stocks, ETFs, or other assets that have outperformed over a defined period, such as the past three, six, or twelve months.
2. Enter positions based on strength
Rather than waiting for pullbacks or undervaluation, momentum investors buy assets showing relative strength compared to the broader market or peers.
3. Exit when momentum fades
Positions are reduced or exited when performance weakens, trends reverse, or predefined rules are triggered.
This disciplined entry and exit process helps prevent emotional decision making.
Momentum Investing Example
Imagine a stock that has consistently outperformed the market over the past six months, supported by strong earnings growth and rising volume.
A momentum investor may buy the stock because it shows sustained strength, not because it looks cheap.
If the stock later starts underperforming or breaks its upward trend, the investor may exit, even if the company’s long term story remains attractive.
Why Investors Use Momentum Investing
It captures persistent trends
Markets often move in trends due to behavioral factors and institutional positioning. Momentum strategies aim to capture these moves.
It reduces subjective judgment
Rules based on performance and relative strength limit emotional decision making.
It adapts to changing markets
Momentum strategies naturally shift exposure as leadership rotates between sectors and assets.
It is supported by research
Academic studies have documented momentum as a persistent factor across different markets and time periods.
Risks of Momentum Investing
Momentum investing has clear risks.
Trend reversals
Momentum can fade quickly, leading to sharp losses if exits are delayed.
Whipsaws
Short term fluctuations can trigger false signals, especially in choppy markets.
Crowding
Popular momentum trades can become crowded, increasing volatility when sentiment shifts.
Requires discipline
Momentum strategies demand strict rule following. Emotional hesitation can undermine results.
Momentum Investing vs Value Investing
Momentum investing and value investing take opposite approaches.
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Momentum focuses on recent performance
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Value focuses on perceived undervaluation
Some investors combine both styles to balance strengths and weaknesses across market cycles.
Conclusion
Momentum investing seeks to benefit from trends by investing in assets that are already performing well. When applied with discipline, it can adapt to changing market conditions and reduce emotional bias.
However, it requires clear rules, risk management, and acceptance of short term volatility.
If you want to explore momentum based strategies in the US market, you can start by observing how stocks and ETFs behave through the Gotrade app. Fractional shares make it easier to test strategies and learn from real market movements.
FAQ
What is momentum investing in simple terms?
Momentum investing means buying assets that have been performing well recently and selling those that have been performing poorly.
Is momentum investing only for traders?
No. While common among traders, momentum is also used in longer term factor based investing strategies.
Does momentum investing always work?
No. Momentum works over time but can struggle during sudden market reversals or range bound markets.
Can beginners use momentum investing?
Yes, but beginners should start small, follow clear rules, and focus on risk management.
Reference:
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FINRA, What Is Momentum Investing?, 2026.
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Corporate Finance Institute, Momentum Trading, 2026.
Disclaimer
Gotrade is the trading name of Gotrade Securities Inc., which is registered with and supervised by the Labuan Financial Services Authority (LFSA). This content is for educational purposes only and does not constitute financial advice. Always do your own research (DYOR) before investing.
