Market momentum is a process of assessing relevant factors as a means of projecting the future movements within a marketplace. The idea is to determine which changes are likely to take place within a given time frame, and cause the market to either move in a different direction, or continue in the same general direction. At the same time, market momentum also has to do with how rapidly relevant factors bring about those changes, and how rapidly the market moves in the projected direction.
Accurately assessing market momentum is extremely important to investors. Along with understanding what is likely to trigger a change in the market’s direction, it is also important to have an idea of how rapidly the marketplace will move in the projected direction. Information of this type can aid an investor in deciding when to execute an order to buy securities, how long to hold onto them, and when to sell them in order to avoid the next anticipated shift in the direction of the market. When the market momentum is assessed with precision, an investor is not only able to maximize the return on any given investment, but also to minimize any reduction on that return once the value of the securities begins to level off and then finally decrease in response to the movement of the marketplace.
Market momentum is often associated with the force that any investments traded in the market exhibit within a specific amount of time. For example, if a market as a whole demonstrates an upward trend for several trading days in a row, the force or momentum is usually considered to be high, especially if the force is created due to an increase in trading volumes. Savvy investors not only want to know when market momentum will take place, but also the reasons behind that momentum, thus making it much easier to determine what type of investment strategy could be used to take advantage of the prevailing circumstances.
Because market momentum can change due to a number of factors, investors must watch the movement of the marketplace closely. Unanticipated factors such as a natural disaster or the death of a key leader at a company that is considered an industry leader may alter the force of a market within a matter of hours. For this reason, investors should always remain informed of any new events that could slow down the momentum, or even cause the market to move in an entirely different direction.
