When it comes to investing, there are many different strategies to choose from. Some investors like to play it safe with long-term, stable investments, while others take a more aggressive approach. One strategy that often gets attention is momentum investing. It sounds exciting, and at times, it can be very rewarding. But like all investment strategies, it has its ups and downs.

So, what exactly is momentum investing? And is it the right strategy for you? Let’s take a closer look at its positives and negatives so you can decide if riding the market’s wave is a smart move.

What Is Momentum Investing?

Momentum investing is a strategy that involves buying assets that have been performing well recently and selling those that have been underperforming. The idea is simple: assets that have been going up in price will continue to go up, and those that have been falling will continue to drop.

This approach relies heavily on market trends and investor behavior rather than a company’s underlying value. Momentum investors use data and charts to identify stocks or other assets that are gaining traction and aim to capitalize on their continued rise.

It’s a little like surfing—investors try to catch the wave of a rising stock and ride it until the momentum slows down. When that happens, they sell and look for the next wave to ride.

The Positives of Momentum Investing

Momentum investing can be exciting, and when done right, it can be very profitable. Here are some of the biggest benefits:

1. Potential for High Returns

Because momentum investors are following trends, they often get into stocks when they are already moving up. If the trend continues, they can make significant gains in a short period of time. This strategy has historically outperformed traditional buy-and-hold methods in certain market conditions.

2. Takes Advantage of Market Psychology

Momentum investing leverages investor behavior. When investors see a stock rising, they want in, which pushes the price up further. By jumping into strong trends, momentum investors capitalize on this herd mentality.

3. Can Be Effective in Strong Bull Markets

Momentum investing thrives when markets are in an uptrend. If the overall market is going up, many stocks will be moving higher, making it easier to find winning trades.

4. Works Well With Technical Analysis

Many momentum investors use technical indicators, such as moving averages and relative strength indexes (RSI), to determine when to enter and exit trades. These tools help remove emotions from decision-making and provide clear signals for action.

The Negatives of Momentum Investing

While momentum investing can be rewarding, it also comes with significant risks. Here are some of the downsides:

1. High Volatility and Risk

Momentum stocks can be very volatile. Just as quickly as they rise, they can fall. If you jump into a stock too late, you might end up catching the downside of the trend rather than the upside.

2. Short-Term Focus

Momentum investing is typically a short-term strategy, which means it requires more attention and frequent trading. This can be stressful and time-consuming for investors who prefer a more hands-off approach.

3. Trading Costs and Taxes

Since momentum investing involves buying and selling stocks more frequently, trading fees can add up. Additionally, short-term capital gains taxes (which apply to investments held for less than a year) are higher than long-term capital gains taxes. This can eat into profits.

4. Can Lead to Chasing Trends

One of the biggest pitfalls of momentum investing is that it can lead investors to chase trends. If you buy a stock that has already seen significant gains, you may be getting in just before it reverses. This is sometimes called the “greater fool theory”—you buy hoping that someone else will buy after you at a higher price, but if that doesn’t happen, you’re left holding the bag.

5. Not Always Effective in Bear Markets

Momentum investing tends to struggle during market downturns. In bear markets, there are fewer stocks with upward momentum, and those that do rise may not sustain their gains. This can make it harder to find good investment opportunities.

Who Is Momentum Investing For?

Momentum investing isn’t for everyone. It works best for investors who:

• Are comfortable with higher risk and volatility.
• Have the time to actively monitor and trade stocks.
• Understand technical analysis and market trends.
• Are willing to accept potential losses and quick reversals.

If you prefer a more stable, long-term investment strategy, something like dividend investing or index fund investing might be a better fit. However, if you enjoy the thrill of trading and have a solid understanding of market trends, momentum investing can be a profitable approach.

Tips for Momentum Investing Success

If you decide to try momentum investing, here are a few tips to improve your chances of success:

1. Set Clear Entry and Exit Rules – Define when you’ll buy and when you’ll sell to avoid emotional decision-making.
2. Use Stop-Loss Orders – Protect yourself from large losses by setting automatic sell orders at a certain price.
3. Don’t Chase Late Trends – Avoid buying stocks that have already made huge gains unless there’s clear evidence they have more room to run.
4. Follow the Overall Market – Momentum investing works best in bullish conditions; be cautious during downtrends.
5. Stay Disciplined – Stick to your strategy and don’t let emotions drive your trades.

Momentum investing is an exciting and potentially lucrative strategy, but it’s not without its risks. While it can deliver high returns in strong markets, it requires discipline, quick decision-making, and the ability to handle volatility.

If you’re considering momentum investing, make sure to educate yourself, start with small positions, and always have a plan in place. And as with any investment strategy, diversification is key—don’t put all your money into one approach.

At the end of the day, investing is a marathon, not a sprint. Whether you choose momentum investing or another strategy, staying informed and disciplined will always be the best path to financial success.