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Applying the Principles of Momentum to Your Stock Portfolio

Thousands of new investors join the fray of the stock market every year, but that figure is dwindling in recent years for a number of important reasons. Primarily, young people are not saving as much money anymore, which has a lot to do with the culture of the time. After the market crash in 2008, consumer confidence decreased to an all-time low, affecting newcomers more significantly than experienced traders. Those who have felt a market downturn before were much more likely to understand that is it simply a trend and that these course corrections are expected phenomena. Younger investors, on the other hand, are not exposed to this understanding of risk and market vulnerability, permanently associating wild losses with the market and opting for a safer mode of saving. Investment vehicles like traditional savings accounts and bonds can sometimes make sense, but these low yield options are only one place that investors should put your money, as putting all one’s money in the same basket won’t allow the nest the chance to grow much.

The uncertainty of the market and vulnerability felt by novice stock pickers after the recession is experienced by all newcomers. In fact, losing on stocks is a rite of passage that all traders will experience. Some will test their luck and learn the hard way not to buy junk or penny stocks, others will heed the advice of those who came before and steer clear of these common traps only to be felled by another pitfall somewhere along the road. This can be discouraging, especially for those who don’t invest their time along with the money when first engaging with their financial future. The fact is that putting in a little effort to learn market trends and generalized patterns of movement will save you months of heartache as you see a mixture of good and bad decisions chip away at the incremental gains you amass learning the ropes of stock trading.

The principle of momentum is one simple market technique to kick your investment profile into high gear. The momentum strategy is premised upon the observation that the market – and its listed, individual stocks – tends to maintain its direction when movement occurs in price. This observation is based upon the easy to read market metric Williams %R Indicator, and is called momentum trading, taking its inspiration from the Newtonian observation that objects in motion tend to remain so.

Simply put, by following a pricing model called ‘candlesticks’ along with a careful reading of the Williams %R value, you can identify opportune times to buy during an uptrend and sell while price is declining. By following the candlestick model rather than a traditional line graph of the price, traders are able to evaluate both the high and low values during a given time period. This is invaluable information because it can show a trending pattern of movement over the course of consecutive short intervals. This can clue you in on whether buying or selling activity is confined to computer generated orders or extends to individual investors like yourself, as well. With large ‘bullish’ candlesticks showing high gains in price over a short space of time and corresponding ‘bearish’ downtrends a savvy investor can judge the weight of an individual movement in price as one that will continue or a generally static price fluctuation.

This is where the Williams value comes into play. With smaller oscillations in price, this value remains somewhat neutral. When a large jump either way occurs, it is very likely time for you to make a move, as well. By implementing simple observation techniques into your trading repertoire, you can learn to become a better investor and actually see gains to your portfolio as a downturn in the market hits. After all, these low points in price are risky, but they are the best time to make additions to your ownership stake.

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Applying the Principles of Momentum to Your Stock Portfolio