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.
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.
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.
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.