So, what really is Momentum Investing?

Every person who has ever come across anything related to the stock market must have heard the mantra to making money in stocks - "buy low, sell high". It's that easy.

Or is it?

The problem with the saying "buy low, sell high" is that nobody really knows what is low and what is high, except for in hindsight. And unless we have a time machine, hindsight isn't that helpful. Think about it, if you buy a stock at 100, thinking that it is "cheap" or "low", and it falls down to 80, what do you do? Well if you liked it at 100, you'll love it at 80. So you either keep holding and become a hopeful investor or you buy more and start on the path of financial destruction.

Think of the other situation, you buy a stock at 100 and it rises to 150. You think it has risen 50% in a short time period, this has to be the "high" that the commandment of "buy low, sell high" talks about. So, you sell. Only to see the stock skyrocket to 400 in the next few months.

Momentum Investing takes "buy low, sell high" and flips it on its head. Read the following quote by the legendary William J. O'Neil.

For over a century, there has been an anomaly that has existed in the markets. This anomaly is called "Momentum" and is very similar to the first law of motion by Sir Isaac Newton (I know there's no actual physics relationship here, this was just an analogy.

According to Momentum Investing, you buy what's going up and sell what's going down. In other words, buy high, sell higher and Sell low, buy lower.

The following principles make up a good momentum investing strategy:

1. Buy rising stocks at a low-risk entry point

2. Minimise and manage your risk using quantitative stoplosses (Cut your losses short)

3. Don't be in a hurry to take profits unless the stock shows signs of topping or reversal

4. Use mathematics to determine optimal position sizing

We'll talk more about each of these factors in the upcoming blogposts. If you liked this blog, do share it with your friends.