Momentum Trading with Discipline
Momentum trading is one of the more popular styles of trading because it allows traders to profit from rapid moves in the markets. Because momentum trading relies on high volatility situations it is even more important to approach momentum trading with discipline. Without such discipline you are likely to tinker with trades that should be left alone, or place trades that never should have been taken. Below you will find ways to improve your discipline in trading momentum strategies.
Always Use a Stop Loss
This is good advice in any type of trading, but can become even more important to those who trade using a momentum trading strategy. Market moves can come suddenly at any time, but they are even more likely when volatility is high. It is also difficult to perfectly time any market moves, and if you are missing some information or conditions change dramatically you can see pullbacks occur that were unexpected. If you don’t have your eye on the trade at the time, and there is no stop loss in place you stand to lose a lot. Think of a stop loss as an insurance policy for your trades, and one that costs nothing, making it an excellent bargain.
Practice Good Money Management
As with stop loss orders, it is always good to practice money management when trading. It can save you when the market turns against you, allowing you to live to trade another day. Money management is especially important for momentum traders as it helps protect against sudden changes in market conditions where you might otherwise find yourself with positions which are too large, or simply too many positions overall. The decision is up to you, but a conservative money management strategy would have you trade no more than 2% of your account balance on any one trade, and having no more than 15% of your account balance at risk in trades at any one time.
Leave Your Emotions at the Door
Again, good advice for any trader, but especially important for momentum traders. When you are trying to catch rapid, and hopefully large, moves in the market it is far too easy to let your imagination and greed get the best of you. You see a trade that looks perfect to you and then greed steps in and suggests you trade 2 or 3 times your normal trade amount, going against your money management rules. Even though money management helps to protect you and imposes a degree of discipline on its own, you still need to have the discipline to stick with your money management plan at all times. You should never take a trade based on emotions such as greed, fear, disappointment or elation.
Conclusion
As you can see, momentum trading with discipline can help you reap the rewards of rapid price movements without adding undue risk to your trading. Always remain disciplined in your trading if you expect to have a long and prosperous trading career.