This is part three of our trading strategies mini-series. We have previously talked through value and contrarian investing, or in other words, finding those attractively priced stocks being overlooked by most of the market, and doing what most of the market isn’t.
In this third par we will take a brief look at opportunities that lots of other investors are getting excited about, or momentum investing, as it is typically known.
SWIMMING WITH THE TIDE
Going with the flow, or momentum investing, is the complete opposite of the previously-discussed contrarian approach, but it can be equally successful.
Momentum investors buy shares that already have a fair wind in their sails, perhaps because future product or trading prospects are improving at a faster rate than the market expects.
Companies such as compound semiconductor technology company IQE (IQE:AIM) or robotic process automation designer Blue Prism (PRSM:AIM) stand out as 2017 examples.
The main point about both of these companies is that their respective market valuations look anything but cheap, yet their long-run growth potential appears vast.
Investors might also search for companies that have had a dreadful time of it, seen their shares hammered, but where there is now potential for recovery.
A HIGH RISK STRATEGY
This may sound like a dangerous strategy, and it can be. Yet it is also capable of delivering significant investment returns because a strong share price run will often last far longer than you might expect.
A share doesn't become a 10-bagger without first doubling in value. So while making twice your stake would represent a storming success for any investor, taking that profit off the table may also mean missing out on the best of the rise over a longer timeframe.
As a rule investors try to buy low, sell high, but momentum investors go a step further, buying high in the hope of selling higher. They therefore risk losing more money than other types of investor. This makes momentum investing high-risk and it will therefore not appeal to many investors.
