Trader Types - Part 1: Momentum Traders

Trader styles are all unique, but generally, each type contains a standard style. Momentum traders are seeking to capture the the strength of a prevailing market idea. These types of traders are looking for either an event or a technical level that would trigger a point of entry or exit.

For event driven momentum traders, a change in prevailing investor sentiment or a re-enforcement of prevailing investor sentiment following a new data point offers the opportunity for the trader to "ride the wave" of other traders.

Event-Driven Example

Let's say general market sentiment is negative on oil. Suddenly, we get a strong report on EIA inventories showing a draw-down (signalling use of supplies) and now, depending on other factors, the sentiment switches to bullish oil. A momentum trader would be buying the instant it becomes clear that sentiment is shifting and the trader will "ride the wave" of the sentiment until it changes.

For technical focused Momentum traders, deviations in price behavior relative to past performance offer trading opportunities.

Related Link: Momentum Traders Dive Into Ocean Power Technologies

Technical-Driven Example

These types of momentum traders will look for disconnects in asset correlations, over-bought or over-sold situations, or even psychological technical trading levels like $100 or $50. If two assets are historically correlated and one begins to behave differently, lets say rises more than it should relative to the other asset, then a technical driven momentum trader would sell that asset to capture it's reverse lower.

Did you like this article? Could it have been improved? Please email feedback@benzinga.com with the story link to let us know!