1. What is price momentum?
Price momentum refers to buying stocks that have been trending upward in price.
It follows the trend.
Momentum investors believe winners stay winners.
And stocks that fall may keep falling.
2. Why do UK investors use momentum
- UK markets show clear trends.
- Momentum can outperform value strategies.
- Momentum adds diversification.
- It helps remove emotion from trading.
3. How momentum works
Momentum strategies follow simple steps:
- Identify top-performing stocks over the past 3 to 12 months
- Buy those that keep rising
- Sell slowly if the trend weakens
Tools like charts and screeners help identify momentum.
4. Timeframes that matter
Typical momentum periods:
- Short-term: 3–6 months
- Medium-term: 6–12 months
- Long-term: 12+ months
Short-term trends can be choppy.
Long-term offers smoother gains.
5. Screening UK stocks for momentum
Use these filters:
- Substantial recent price rise (20%+ over 6 months)
- High trading volume
- Clear trend above the moving average
Eliminate low-volume or highly volatile stocks to avoid false breaks.
6. Risk control strategies
Momentum can swing both ways.
Manage risk by using:
- Stop-loss orders – limit losses
- Position sizing – never invest too much in one stock
- Diversification – spread across sectors
These steps protect your capital.
7. Deciding entry points
Momentum entry methods:
- Buy on breakout above recent highs
- Buy on a short dip in a rising trend
- Avoid buying into sharp recent rises (might be overbought)
Be disciplined and wait for clear trend signals.
8. When to exit positions
Exit signals include:
- Stock drops below its 50-day or 200-day moving average
- Volume dries up during rallies
- Relative strength index (RSI) falls below 40–50
Sell only when the trend meaningfully changes.
9. Blend momentum with fundamentals
Momentum need not ignore fundamentals:
- Check earnings growth
- Assess debt levels
- Understand the business model
This avoids chasing purely hype-driven stocks.
10. UK market peculiarities
Special considerations in the UK:
- Stocks span from large cap to micro cap
- The London market moves more slowly than the US market
- Small-cap momentum can be more dramatic
Use broader screeners to cover all market parts.
11. Avoiding momentum traps
Momentum traps occur when:
- Trend reverses unexpectedly
- The company issues a surprise
- The sector rotates against you
Use stop-losses and stay alert to reduce the impact of traps.
12. Holding period best practices
- Sell after the trend reversal
- Or hold for a predefined period (e.g., six months)
- Momentum works best for medium-term periods
Avoid holding stagnant stocks for an extended period.
13. Sector momentum trends
Track sector rotation:
- Track sectors like energy, banking, and tech
- Sector momentum often precedes stock momentum
- Investing in the right industry boosts returns
Adjust your screeners accordingly.
14. Momentum and dividends
Momentum stocks may not pay dividends.
But momentum and dividend strategies can be combined:
- Buy momentum stock
- Add dividend components for income
This balances growth and cash flow.
15. Back-testing momentum strategies
Before investing real cash:
- Test with historical UK data
- Check outcomes over different market cycles
- Optimise filters and time frames
- Adjust rules based on results
A back-tested strategy offers confidence.
16. Tools to support momentum investing
- Charting platforms (e.g., TradingView)
- Screeners with momentum filters
- Broker notifications for trend changes
- Technical toolkits for pattern recognition
These tools help make momentum easy to follow.
17. Common mistakes to avoid
- Chasing fads after big runs
- Using no stop-losses
- Over-trading based on short-term swings
- Ignoring liquidity and trading volume
Stay disciplined for steady results.
18. Case example
Imagine tracking FTSE 250 stocks:
- Screen for a 6-month return above 20%
- Check volume and trend charts
- Buy on breakout above recent high
- Set stop-loss just below the 50-day average
- Hold while above the trend line
- Sell once the trend weakens or price breaks down
This structured approach limits emotion and bias.
19. Combining momentum with technicals
- Use moving average crossovers (50-day over 200-day)
- Watch RSI for overbought conditions
- Combine trend and volume indicators for clarity
This adds depth to entry and exit decisions.
20. Momentum performance during cycles
Momentum may lag during sudden market reversals.
It works best when trends stay in place.
Diversifying by sector and timing helps.
21. Momentum in global markets
UK momentum can join global trends:
- USD rates may shift sentiment
- International earnings boost UK exporters
- Global theme rotation creates momentum in UK stocks
Track both local and global themes.
22. Market psychology and momentum
Momentum relies on crowd behaviour:
- Price moves when investors join a trend
- Fear and greed can push the momentum further
- Following trends quietly can yield results
23. Tax and momentum trading
Frequent trading may trigger capital gains tax.
Utilise tax-efficient accounts, such as ISAs, to protect your profits.
Know your tax status before trading actively.
24. Tracking performance metrics
Track:
- Win/loss ratio
- Average gain/loss
- Maximum drawdown
- Overall return vs benchmark
These metrics help refine your strategy.
25. How to build a momentum portfolio
- Create a watchlist weekly
- Rank by recent returns
- Add best-ranked stocks to your portfolio
- Review weekly and trim losers
- Hold strong performers with defined exit rules
Keep the process simple and repeatable.
26. Lessons during market downturns
Momentum falls hard when markets turn.
Protect yourself by:
- Using stop-losses
- Reducing position size
- Exiting when the broader market weakens
27. Adaptive strategy tips
- Review criteria each quarter
- Adjust filters for more or less volatility
- Learn from past trades
- Gradually tighten or loosen thresholds
Flexibility helps momentum strategies adapt to new trends.
28. Role of emotion in momentum
Momentum can help remove emotion from trades.
Stick to the plan; don’t overreact to news or fear.
Discipline beats instinct.
29. Summary: key takeaways
- Momentum captures trending stocks
- Use filters, charts, and volume to find entries
- Control risk with stops and size limits
- Combine with fundamentals for safer trades
- Track performance to refine results
30. Final thoughts
Momentum is a powerful strategy.
It requires discipline, not prediction.
You don’t need to guess the market—follow trends.
With clear rules, UK momentum investing can work well.