Momentum trading is the practice of buying assets whose prices are rising strongly and selling those that are falling, in the expectation that the move will continue; it is the active, shorter-term application of momentum, which the main entry covers as a market effect and an investment factor. The main entry sets out the evidence, the explanations offered for it and its risks.
The phrase usually refers to the way individual traders apply the idea, over horizons from minutes to a few weeks. A momentum trader looks for a price that is moving fast on heavy volume, often after news or a breakout from a trading range, enters in the direction of the move, and exits when the pace fades. Indicators such as the relative strength index and moving averages are used to judge strength. This differs from the academic factor, which is measured over months and held in diversified portfolios of many shares.
The approach overlaps with trend following and swing trading. Its main hazards are sharp reversals, buying late in a move, and the costs of frequent trading. Traders commonly limit losses with a stop-loss order.