There are two schools of thought when it comes to technical analysis: Follow momentum, or try to time the markets. If you step back and look at each methodology in isolation, it is clear that momentum beats market timing when it comes to trading.
My good friend and mentor, Dave Landry, is a self-proclaimed “trend following moron.” Dave recognized long ago that following momentum can lead to substantial wins (and eventually, riches). I learned the secret of following trends many years back, and it has served me well over the years.
Market timing can work as an investment tool
I often say that trying to time the markets is a fool’s game, but that only applies to short-term trading. Market timing can be a fruitful exercise as an investment tool. Indeed, you can build a nice portfolio after a market crash.
This past spring saw the biggest short-term decline ever during a single month. The SPX 500 fell by 34% in March. Trying to time a trade was nearly impossible due to extreme volatility, yet some of the ridiculously low prices were some of the best buys in nearly 12 years.
The global financial crisis of 2008-09 was the last opportunity to snap up stocks that were sent to the woodshed. Names like Bank of America and Amazon flirted with disastrous consequences but have been flying high ever since. If you traded the stocks, you likely did not hold and sit with regret. Good timing.
If you want to try your hand at marketing timing, follow sentiment indicators, overbought/oversold readings and market reaction to news.
How momentum beats market timing
Following momentum is an ideal trading tool. It involves spotting strong trends, identifying direction and going with the (money) flow. Whether the trend is up or down doesn’t matter. The markets are all about liquidity, and money flows dictate price action. When money flow is strong, prices rise (and they tend to continue moving higher).
Two of the better momentum names in 2020 have included Peloton and Zoom. If you look at their charts, you’ll see that they moved from lower left to upper right. These stocks, and many others with momentum behind them, show their power regardless of market conditions. When buyers want in, they get in and ride the trend.
Want to learn more about momentum trading?
I’ll be discussing how to use momentum to find winning trades in detail during our FREE monthly webinar this Thursday, November 19, at 4:30pm EST. Reserve your spot today!
