Learn to how integrate momentum trading into your strategy - Story

Momentum Trading for Swing Traders

What is Momentum?

If you’re a swing trader who wants to understand more about momentum trading, this story is for you.  While I’ve written in detail about some of the key swing trading strategies, this post will also explain how to integrate momentum trading into your swing trading. I'll start by explaining what momentum trading is, why you might include it as part of a swing trading strategy.

What is Momentum?

For thie article this story is based on,  I did three backtests across three asset classes, stock, commodities, and cryptocurrencies.  I used a different momentum trading strategy on each, and while the results were positive, it was the cryptocurrency strategy that has outstanding returns but we'll come back to that.

What is Momentum?

So, thinking back to your science class at school, where P is momentum. By multiplying the mass of something by velocity, we get momentum.  And that's the basic premise of momentum when it comes to the markets.

What is Momentum?

Momentum is the rate of change of an instrument's price. We're not concerned about the direction of price; we're only concerned about the pace of the change itself. High numbers indicate the price is quickly increasing or decreasing value.  Quick is a relative number to what's happened before. It's not relative to other instruments, other stocks, or other commodities. It’s relative to the price itself of that particular instrument.

Momentum Follows Price

As price increases or decreases in value, the swing trader should see momentum confirmation with a new high or new low.

Momentum can be a Confirmation Indicator

As price increases or decreases, the swing trader wants to see this change mirrored by momentum. In this way, momentum is a confirmation of what you're seeing in price in the price chart. Rising or falling momentum can be a box that's ticked prior to the decision to trade. If your trading system signals a buy or sell, momentum can confirm that signal.

Backtest #1: Momentum Trading Country ETFs

The basic principle of the first backtest was the premise that buying an ETF of a country's equity index that had previously performed well would produce profits. A portfolio was created of a variety of ETFs from those in Europe, Asia, South America, North America. This was a long-only strategy.

Backtest #1: Momentum Trading Country ETFs (cont)

– ETFs which invest in a variety of country equity indexes – Portfolio includes ETFs coverign Europe, Asia, South America and North America – Long only – Examines performance of the prior month. The top 5 performing ETFs are bought – Traded only once per month

Backtest #1: Momentum Trading Country ETFs (cont)

The strategy worked by examining the performance of these ETFs in the prior month. Only the top five performing ETS of the prior month are bought and the strategy only traded once a month.

Swipe up to see the results and other backtests on the Momentum Trading blog post