Momentum investing
Also known as: momentum strategy, momentum trading
Momentum investing is a strategy built on a simple observation: that have performed well recently tend to keep performing well for some period afterward, and that have performed poorly tend to keep lagging. Rather than trying to identify undervalued companies, a momentum investor buys already in an , betting that the forces driving the move, whether improving fundamentals, rising analyst attention, or simply other investors piling in, will persist long enough to produce further gains.
In practice, momentum strategies typically rank by their price performance over the past several months to a year, then buy the strongest performers while avoiding or shorting the weakest. Academic research has found that momentum effects show up across many markets and time periods, which is part of why the approach has attracted both individual traders and quantitative funds. The logic often points to behavioral causes: investors underreact to good news at first, then chase a higher once the trend becomes obvious, extending the move beyond what fundamentals alone would justify.
Momentum investing carries real risks that separate it from patient, fundamentals-driven approaches. Trends can reverse sharply and without warning, especially when a crowded trade unwinds, and a 's price already reflects a great deal of optimism by the time momentum signals turn positive. This makes momentum a strategy that tends to reward discipline around exits and rather than conviction in any single 's long-term story, and it works best as a systematic, rules-based approach rather than a loose habit of buying whatever has been going up.