Momentum investing: What is it and what are the main risks involved in following this investment approach?

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investing strategy involves prioritising the purchase of assets experiencing upward momentum and selling them when indications suggest a weakening trend. The fundamental concept is rooted in the belief that trends exhibit persistence, implying that if a stock or asset is on an upward trajectory, it is more likely to continue rising than to abruptly reverse direction. Typically, momentum investors employ technical analysis techniques, examining charts and indicators like moving averages and the relative strength index (RSI) to pinpoint trends and potential entry or exit points.

Beginners in the market often adopt this strategy based on insights provided by financial experts, whether online or offline. In contrast to alternative investment approaches, momentum investing can be a relatively straightforward strategy to execute, particularly when compared to the complexities of fundamental analysis, which requires a thorough examination of a company’s financials and business outlook. This approach can yield substantial returns, particularly during bullish market conditions when trends are robust and enduring.

Momentum investors hold the belief that once a trend, whether upward or downward, takes shape, it is likely to persist for a certain period. Their strategy involves purchasing assets on the rise and divesting those on a downward trajectory, to capitalise on and profit from these trends. Momentum strategies leverage investor psychology, specifically the effects of herd mentality and the fear of missing out (FOMO).