Momentum trading is probably the most mainstream of all swing trading strategies. This is because it works best during bull markets, and history is riddled with longer durations of bull markets than bear. It's also the easiest to execute and pivot points are the easiest to identify visually.
Momentum is built on the concept of magnitude-duration. What do I mean by magnitude-duration? In theory, stocks have limited supply (number of shares outstanding) but the demand can be infinite (no telling how many investors would want to buy the stock). So the natural tendency of stocks is to go up, but at a certain angle or pace of ascent (see the black line that slopes upward in the image below).
On the other hand, the natural tendency of investors is to be irrational, as we can't help but be human. So there are many times that people bid up the prices of stocks ahead of the natural angle/pace of ascent. Cliche as it sounds, let us call these instances "irrational exuberance" or "magnitude"(green arrows). When excesses like these occur, it is but natural that these excesses need to be corrected. Thus stocks either move sideways or downwards in time, until it meets up with its natural pace of ascent. Stocks therefore "revert to their means" and do this through time, thus we call this "duration". So long as the trend of the stock (whether up or down) is intact, it will follow this "staircase" pattern of up then sideways/down, then up again or vice versa.
So how does this concept of magnitude-duration relate with the strategy called momentum trading? In momentum trading, you avoid being in a stock while it is in duration mode (correcting or going sideways), while you want to be in a stock while it is making its magnitude (trending). Thus in the image above, you want to be in the stock during the green arrows, and out during the red arrows. This is why traders always beat buy and hold investors. Its easier to go in and out of a stock four times in a year and make just 5% each time for an annual return of 21.6%, compared to buying and holding a stock that goes up 20% with a lot of stomach-churning swings in between. You get less sleepless nights as you only hold a stock when it is moving. When a stock is going sideways or down, you would still have to question if your decision to buy the stock is correct. Also, you can use the freed up cash to trade other stocks that are currently moving.
