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Momentum trader is a term for a day trader who uses a strategy based on trying to predict the trends in market prices. There are two types: An event-based momentum trader is a day trader who makes trading decisions based on market volatility resulting from news or incidents happening in the course of a trading day. A technicals-based momentum trader is a day trader who makes trading decisions based on the market being perceived by the trader as being higher or lower than expected. Momentum signals (e.g., the 52-week high) have been shown to be used by financial analysts in their buy and sell recommendations.
Event based momentum trader
When the news breaks out, the market will usually become very volatile. The markets for affected stocks and other financial instruments generally swing a lot starting the moment the news comes out and potentially lasting for a few hours. During this time momentum traders try to make money making very rapid trades based on the values of those financial instruments fluctuating wildly. They need lightning fast execution to enable them to grasp these opportunities; the difference between success or failure may be determined in just a second. A delay of seconds to minutes, as is common in traditional online trading, would therefore not be acceptable to such traders.
Technicals based momentum trader
- higher than it should be, in which case the day trader can make money by shorting now and buying later;
- lower than it should be, in which case the day trader can make money by buying now and shorting later.
- Low, R.K.Y.; Tan, E. (2016). "The Role of Analysts' Forecasts in the Momentum Effect". International Review of Financial Analysis. doi:10.1016/j.irfa.2016.09.007.
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