Momentum investing is investing with intended capitalization on trends in price movement. This type of investment strategy can be applied several financial instruments including foreign exchange, stocks, commodities or other derivative securities. Momentum investing sometimes has credibility as a technique but other times does not. A part of this investment method subscribes to the group mentality "if everyone else is doing it this way, I probably should too." While this technique may be based on market reaction to financial events surrounding a company, it may also be caused by price manipulation and/or heavy options trading based on "strong" technical indicators.

Market psychology and technical indicators of that psychology are a big part of momentum investing. These are both subjective market indicators that have statistical significance as demonstrated by the statistical value Beta.

An example of a momentum scenario is as follows: Company A just receives news from the Food and Drug Administration that its new cancer prevention drug was approved. Following the news some investors decide it is favorable to the company's financial well being and buy shares in that company. Technical analysts may see this price response and decide the stock movement is matching a pattern in their analysis and also buy causing more price movement.

At some point the price momentum may carry itself in the sense that other investors might think something bigger than what has actually happened is happening. The statistical result becomes a measurement in which events in one part of an economy or industrial sector influence stock prices for particular businesses, i.e., the whole biotech sector could be influenced by the events of Company A above. This correlation is measured statistically and is considered reason enough to give merit to the concept of momentum investing.

Statistical values like the Beta correlation measure the slope of "covariance" between dependent and independent variables, i.e., the FDA decision and Company A's stock price. Traders who study these movements have theories and techniques they use to predict such movements such as price momentum either upwards or downwards. These techniques are based on statistical and mathematical calculations that measure past price history patterns.

An example of a technical indicator is the Rate of Change (ROC) measurement. The ROC measures how much faster or slower a price is changing as compared to previous points in time. While the technical indicators may be accurate in demonstrating an increase or decrease in the rate of change it may not mean that change will continue.

Momentum investing can be risky as market conditions can change quickly and unforeseen and/or unstudied events may influence a price suddenly. When employing this trading strategy it is a good idea to know the "technicals" behind it, i.e., mathematical and graphical representations of price history relationships. What's more, the technical indicators alone may not be enough to make a wise investment decision. In such a case it can be helpful to utilize additional investment measures and techniques:

To summarize, momentum investing is one of the many strategies used in investing. Investing, like a sport, art or science is a composition of methods and forms. Taken alone, momentum investing can be a heavy gamble. However, despite the risks of this method there is a grain of truth to the story of momentum investing that allows the potential to profit using this technique. By using well applied techniques and sound financial judgment, the momentum investing method may yield investment success.