Momentum trading: spot a trend and ride it to profits

Momentum traders aim to find trends in the markets and profit from them. So how does momentum trading work, and is it effective? Tim Bennett reports.

We favour value investing here at MoneyWeek. Find an asset that's cheap and buy it, then sit on it until the market wakes up to that fact, and sell for a profit. Long-term studies suggest that it's effective, but it does take a lot of patience, and a fair bit of time perusing balance sheets and other data.

But what if none of that matters? That's what momentum traders (or trend followers') think. All that matters to them is where the price is heading up or down and the strength of the trend. As Michael Covel, author of Trend Commandments, notes on Trendfollowing.com: "There is no need to figure out why a market is trending, just follow it." So how does it work and is it worth trying?

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.