This functionality makes the momentum indicator a vital component in the toolkit of traders, especially for confirming the direction and strength of market trends. Momentum is used in trading to identify stocks with strong price movements and profit potential. Yes, momentum trading strategies have proven to be effective in various market conditions, especially in markets that exhibit strong trends. However, the success of momentum trading strategies mostly depends on the trader rather than the strategy. A momentum trader thrives in volatile and hectic markets, and has the ability to take and extend profits during trending markets.

Momentum Indicators

So, the investment in Stock B decreases from $10,000 to $4,000, resulting in a 60% loss. In this article, we’ll look at momentum investing and its benefits and pitfalls. For fiscal 2024, nine analysts revised their earnings estimate upwards in the last 60 days, and the Zacks Consensus Estimate has increased $0.16 to $6.43 per share.

Related news

There is no single momentum technical indicator that fits all occasions. That’s why it’s essential to know different indicators and how to use them in different trading strategies. Finding the best momentum stocks can sometimes pay off for nimble investors. Momentum bucks traditional investing principles, yet research supports its merit. Reversal trading is a strategy that involves identifying potential turning points in the market and entering trades in the opposite direction of the prevailing trend. This approach can be more challenging, requiring you to accurately predict when a trend is about to reverse.

Trading Trends & Reversals

The RS line, the blue line in the chart provided, tracks a stock’s performance vs. the S&P 500. The firm upgraded Norwegian Cruise Line to buy from neutral and raised its price target to 30, up from 20, citing its recent strategy shift. Carnival stock broke out as cruise lines rallied on strong momentum, with most set to report Q3 earnings this month. Investors can count on the Zacks Rank’s success, with #1 (Strong Buy) stocks producing an unmatched +25.41% average annual return since 1988, more than double the S&P 500’s performance. But the model rates a large number of stocks, and there are over 200 companies with a Strong Buy rank, plus another 600 with a #2 (Buy) rank, on any given day. Momentum traders benefit from herd mentality, greed, and fear of missing out.

Carnival, Cruise Stocks Rally

The firm lifted its price target on Carnival Cruise stock to 28 from 25 and kept a buy rating on the shares. Thus, the more stocks you own with a #1 or #2 Rank and Scores of A or B, the better. Trade Ideas also comes with charting, backtesting, automated trading and more. We’ve already analyzed tens of thousands of financial research papers and identified more than 700 attractive trading systems together with hundreds of related academic papers. Generally, CCI is used to find indications of a new trend when ranges break.

Get Kiplinger Today newsletter — free

« With nearly half of 2025 booked and less inventory remaining for sale than the prior year, we are leveraging strong demand to achieve record ticket pricing, » Weinstein said in the release. « Likewise, 2026 is off to an unprecedented start achieving record booking volumes in the last three months. » The firm also expects Royal Caribbean to announce a long-term plan within the next two quarters, likely in conjunction with its Q3 or Q4 report. Citi said it doesn’t see any reason that the cruise operator can’t achieve $20 per share in earnings.

• They can take the volatility factor in their stride and use it to their advantage by maximising their returns on investment through momentum trading.
• Still ranked as a category 5 storm, meteorologists expect it will inflict significant damage in the Tampa area after it makes landfall.
• This overextended state is often identified by a series of vertical bars on the 60-minute chart.
• However, sometimes shorter hourly periods are charted to indicate whether it is a good idea to make a short-term asset purchase.
• The primary goal behind momentum trading is to buy when the momentum is strong and sell when it starts to fade.

Relative volume

To capture “momentum”, UMD portfolio goes long stocks that have high relative past one-year returns and short stocks that have low relative past one-year returns. It’s crucial to confirm the divergence pattern and not rely solely on the RSI. This strategy often works best in a trending market where the RSI divergence can signal a potential continuation of the current trend​​. To add strength to the crossover signals, traders will use both the EMAs and the histogram.

What Is Market Momentum?

An example of such a momentum indicator is the Moving Average Convergence Divergence (MACD). The most popular fall into three categories, as explained in the following momentum indicators list. Below is our take on some of the most popular momentum indicators available on the Capital.com platform, and how one could incorporate them into their trading strategy. Momentum has a natural time element to it, so you have to think beyond today’s closing price and identify long-term momentum trends by investigating price and volume patterns in charts.

Trend Momentum with ADX

In the stock market, momentum refers to the strength and direction of a stock’s price movement. There are several indicators that help in identifying stocks with good momentum. Investors and technical traders can follow several indicators to gauge market momentum. Positive momentum can indicate a potential bullish trend while negative momentum can indicate a bearish trend. Broadly, momentum can be measured across both asset classes and individual securities, with market momentum, in particular, referring to the overall market. Relying on technical analysis leaves you exposed to having your trade undone by “real world” events.

Investing in Momentum Stocks in 2024

MACD divergence is a signal of waning momentum and, therefore, of a possible impending trend change. It’s crucial to understand, however, that the RSI’s indication of overbought or oversold conditions does not inherently mean an imminent trend reversal. For instance, the RSI may remain in an overbought zone for an extended period without a corresponding trend reversal. Hence, it’s advisable to use the RSI in conjunction with other technical indicators to gain a more comprehensive view of the market conditions. This approach enhances the accuracy and reliability of trading decisions based on the RSI. The Relative Strength Index (RSI) is a critical tool in momentum trading, acting as an oscillator that fluctuates between zero and 100 on its scale.

Since the Scores were created to work together with the Zacks Rank, the direction of a stock’s earnings estimate revisions should be a key factor when choosing which stocks to buy. With more than 800 top-rated stocks to choose from, it can certainly feel overwhelming to pick the ones that are right for you and your investing journey. Each stock is given an alphabetic rating of A, B, C, D or F based on their value, growth, and momentum qualities. With this system, an A is better than a B, a B is better than a C, and so on, meaning the better the score, the better chance the stock will outperform.

Get Premium Strategy Ideas & Pro Reporting

In fact, in its worst year since going public, Kinsale still managed a 10% gain for investors. If you aren’t familiar with its business, Kinsale is an insurance company. Instead of providing coverage for everyday Americans, however, the company specializes in the unusual. Kinsale is a specialty insurer, focusing on property and casualty insurance for high-risk businesses and situations where it’s difficult to accurately estimate risk of loss. For example, many traditional liability insurers wouldn’t provide coverage for a demolition business; Kinsale would. It wasn’t too long ago that investors started to lose faith in Robinhood (HOOD -1.7%) after trust issues with the platform developed among retail investors during the meme stock frenzy.

So, if you feel you have the skill of identifying momentums in trading, then go ahead and try it. So, this strategy involves entering trades after a price retracement in the direction of the primary trend. The idea is to catch the “pullback” in a trend before it resumes its main direction. From the chart above, we can see that the price is forming a higher high.

Are there risks associated with using momentum indicators?

• It wasn’t too long ago that investors started to lose faith in Robinhood (HOOD -1.7%) after trust issues with the platform developed among retail investors during the meme stock frenzy.
• It helps in making the best use of the oscillations in the price of a stock.
• High or increasing volume is commonly interpreted as a sign that the existing trend has strong momentum.
• Momentum bucks traditional investing principles, yet research supports its merit.

This means watching all the updates to see if there is any negative news that will spook investors. Tighten up stops or consider a blind exit when technical barriers are hit like a major trendline or previous high/low. Exit or take partial profits when crossovers signal potential trend changes. Early positions offer the greatest reward with the least risk, while aging trends should be avoided at all costs.

Reversal Trading

Stay away from leveraged or inverse ETFs because their price swings don’t accurately track underlying indices or futures markets due to complex fund construction. Regular funds make excellent trading vehicles but tend to grind through smaller percentage gains and losses compared with individual securities. On paper, momentum investing seems less like an investing strategy and more like a knee-jerk reaction to market information. The idea of selling losers and buying winners is seductive, but it flies in the face of the tried-and-true Wall Street adage, « buy low, sell high. » Citigroup on Wednesday said its data analysis suggests the recent growth and rally in the cruise space « has real legs » into 2025 and beyond.

Choosing a Momentum Scanner

Momentrum indicators are technical analysis tools used to determine the strength or weakness of a stock’s price trend. Common momentum indicators include the relative strength index (RSI) and moving average convergence divergence (MACD). You can use technical analysis tools like volume, moving averages, and trend lines to identify momentum stocks for intraday trading. You can also look for stocks with high relative strength and positive momentum indicators. Momentum indicators are technical analysis chart overlays to assist traders in identifying a stock price movement’s strength and direction.

Five momentum stocks

The RSI is a popular momentum oscillator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the stock market. The RSI ranges from 0 to 100, with readings above 70 indicating overbought conditions and below 30 indicating oversold conditions. Traders use RSI to identify potential trend reversals and confirm a trend’s strength. These momentum indicators can be used differently depending on the trader’s strategy and risk tolerance. Some traders use them to time their entry and exit points, while others use them as a confirmation tool to validate other indicators or chart patterns.

Generally, pullbacks and breakouts are a big thing in momentum trading, largely because they provide a good entry opportunity during an ongoing trend. Jeff Reeves writes about equity markets and exchange-traded funds for Kiplinger. A veteran journalist with extensive capital markets experience, Jeff has written about Wall Street and investing since 2008. His work has appeared in numerous respected finance outlets, including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today and CNN Money. Relative momentum compares securities against peers to identify the strongest performers. Absolute momentum identifies one security’s inclination for momentum in isolation.

• Moreover, momentum traders interpret a certain MACD condition as an indicator of a strong market trend.
• This equation can lead to the drawing of a trendline with varying periods used in the calculation.
• The RS line, the blue line in the chart provided, tracks a stock’s performance vs. the S&P 500.
• Technical/Fundamental Analysis Charts & Tools provided for research purpose.
• Regular funds make excellent trading vehicles but tend to grind through smaller percentage gains and losses compared with individual securities.
• Suppose you invest for six months, and you have $10,000 to invest in each stock.
• It works by comparing the average number of higher closes in a given period, divided by the average number of lower closes.

Generally, they look for stocks that are trading above their moving averages as a sign that they will continue moving higher. Alternatively, short-sellers look to capitalize on a stock that’s on a downward trend. Momentum investing can also be a popular strategy among professional investors such as hedge funds. Welles Wilder Jr. in the late 1970s; his « New Concepts in Trading Systems » (1978) is now an investment-lit classic. Once these numbers are charted, they can be compared to thresholds to see if the stock is oversold or overbought.

Finally, traders can interpret momentum indicators by looking for centerline crossovers. Centerline crossovers occur when the momentum indicator crosses above or below Stock Momentum its centerline (usually set at 50). Divergence occurs when the price of a stock moves in one direction while the momentum indicator moves in the opposite direction.

The strength of momentum trading is in alignment with the fundamental principle of the market – that trends, once established, tend to persist. This indicator operates on the principle that price retracements within specific levels can reveal discernible market trends. However, in momentum trading, the strategy is actually to enter and exit trades based on these trends rather than attempting to pinpoint the absolute highs and lows of the market. It’s not a secret that knowing how to ride the momentum in trading is a key part of being a successful trader. Different momentum indicators have different formulas and serve different purposes. The most basic momentum indicator compares the last closing price to a previous closing price from a set number of periods ago.

Alternately, the price could pierce the third or fourth standard deviation of a top or bottom 20-day Bollinger Band. CEO Josh Weinstein said unit operating income increased 26% due to operational improvements and high-margin, same-ship yield growth. Carnival’s advanced booked position for 2025 is already ahead of 2024’s record, with higher prices than last year. Weinstein added that Carnival is well-positioned with a stronger base of business for 2025 and set for a record start to 2026. You want to make sure you’re buying stocks with the highest likelihood of success, and to do that, you’ll need to pick stocks with a Zacks Rank #1 or #2 that also have Style Scores of A or B.

If you like a stock that only as a #3 (Hold) rank, it should also have Scores of A or B to guarantee as much upside potential as possible. Price Data sourced from NSE feed, price updates are near real-time, unless indicated. Technical/Fundamental Analysis Charts & Tools provided for research purpose. Please be aware of the risk’s involved in trading & seek independent advice, if necessary.

• Momentum investors can leverage the shifts in the stock prices that arise due to emotional investors instead of giving in to emotional responses to a stock price.
• To reach the best evaluation, experts generally chart the RSI on a daily time frame rather than hourly.
• Plus, the business has been (successfully) leveraging AI technology to improve engagement and content personalization.
• For example, if the RSI is above 70, it’s a sign that the market may be overbought and due for a pullback.
• Momentum indicators are useful tools for traders to identify potential market trends.
• As an individual investor,  momentum trading will most likely lead to overall portfolio losses.

To identify divergence, traders often compare a stock’s price to the moving average convergence divergence (MACD) or the relative strength index (RSI). If the price is making higher highs, but the momentum indicator is making lower highs, it may be a sign of bearish divergence. Conversely, if the price is making lower lows, but the momentum indicator is making higher lows, it may be a sign of bullish divergence.

Momentum indicators are meant to help traders spot whether the market trend will continue or reverse. Beyond that challenge of identifying stocks with a difficult-to-define « it » factor, it is also important to understand that momentum cuts both ways. Just as some stocks seem to go up illogically just because investors like them, other stocks can crash and burn when Wall Street gives up on them. That’s true regardless of the facts of the news cycle or hard numbers around earnings or sales. Some companies are trading at low levels for good reason and are likely to see further declines.

It takes discipline to trade this way because the trade must be closed at the first sign of weakness, and the funds must be immediately placed into a different asset showing strength. To illustrate how momentum investing works, let’s consider a hypothetical scenario involving Stock A and Stock B. Some robo-advisor platforms now offer portfolio options that incorporate momentum strategies.

This can lead bull markets to rise higher than fundamentals might predict. If you intend to practice momentum investing, make sure you choose the proper securities and consider their liquidity and trading volume. Although he wasn’t the first to use the strategy, fund manager and businessman Richard Driehaus is often credited as being the father of momentum investing. High or increasing volume is commonly interpreted as a sign that the existing trend has strong momentum. A volume scan requirement might be something like, “Current trading volume greater than 10-day average trading volume”.