What is Momentum Trading?

What Does Momentum Trading Mean?

By Matthew Frankel, CFP – Updated Oct 12, 2025 at 11:06 PM EST

Key Points

Momentum trading profits from stock trends, often spurred by events like earnings reports.
Key strategy involves buying stocks at new highs, predicting further rises.
High risk involved, as trends can abruptly reverse, leading to potential significant losses.

"The trend is your friend."

So say the momentum traders, the action junkies, and the rocket-stock aficionados. When a stock is going up, they posit, you should buy because stocks have momentum. If they've gone up in the past, they tend to keep going up. But is that really true?

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Stock traders looking at monitors. — Image source: Getty Images

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Momentum trading is the practice of trying to make money by trading stocks along with a trend. For example, if a stock is soaring after releasing a stellar earnings report, a momentum trader might try to buy shares and ride the stock's price higher. Or, for a very relevant example in the modern stock market, if a stock's price starts to rise because of a rumored short squeeze, momentum traders might buy shares with the hope that the short squeeze continues to push the price higher.

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Short Squeeze

When many investors short a stock (bet against it) but the stock's price shoots up instead.

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Trend Reversal

A shift in the prevailing direction of a market's price movement, from upward to downward or vice versa.

In his classic text on the advantages and disadvantages of various investing strategies, Investment Fables, Aswath Damodaran of the Stern School of Business at NYU states his doubts. After crunching the numbers, he concludes that while it's true in general that a stock that has been going up keeps going up, "timing can make the difference between success and failure" when you trade on momentum.

When a stock rockets on a better-than-expected earnings release, for example, seconds can count. Good news can spark a nearly instantaneous rise in price, and the profits go only to the quickest clickers. Gun-shy traders face a different problem. Stocks that have risen for six months straight tend to continue rising for a while, but if you wait six months to identify the "trend," you have by definition forgone all the profits to be made while the trend was forming.

In short, momentum trading is risky. Citing statistical data, Professor Damodaran further explains that, "Momentum stocks have an average beta almost twice that of the rest of the market ... and are much more volatile."

The problem is that this process works both ways. Traders who buy a stock because it's going up may quickly turn around and abandon the stock when it stalls. At that point, a tidal wave of selling starts. Sellers, desperate to get out of the stock, will offer to sell it for progressively lower prices, forcing the price downward.

The bottom line on momentum trading is that it is a higher-risk way to put money to work in the stock market. And it's certainly a form of trading, not investing. Momentum trading can be a good way to make money when things work out, but it can quickly result in big losses if things go the other way. Invest accordingly.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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@MattFrankelCFP

Matt Frankel has positions in Upstart and has the following options: short December 2025 $95 calls on Upstart. The Motley Fool has positions in and recommends Tesla and Upstart. The Motley Fool has a disclosure policy.