Momentum investing is a strategy built on a simple, almost rebellious idea: buy assets that are already rising and sell them once they start to fade, rather than hunting for bargains and waiting for the market to catch up. It sounds backward to a lot of investors, but for decades it has attracted traders willing to move fast and accept real risk.
The approach traces back to Richard Driehaus, a Chicago money manager who built his career on the belief that you could make more buying high and selling higher than buying low and hoping. Driehaus started as a research analyst at A.G. Becker in 1968, at a time when value investing, the Benjamin Graham and Warren Buffett school of hunting undervalued companies, dominated the conversation. He went the other way, chasing companies with accelerating earnings, rising volume, and climbing share prices. In 1982 he founded Driehaus Capital Management and turned that instinct into a full strategy.
How the strategy actually works day to day
Picture market volatility as a series of ocean swells. A momentum trader rides one wave up, then jumps to the next swell before the first one collapses. The goal is to catch a security while it is climbing, ride it as long as the trend holds, then rotate the capital into the next opportunity before the crowd catches on. Momentum traders are essentially trying to get ahead of herd behavior rather than get caught in it.
Five practical rules tend to separate successful momentum traders from everyone else who gets burned: pick liquid securities, manage risk carefully on both entry and exit, try to get in early rather than late, choose a holding period that matches your risk tolerance, and time the exit with discipline. Skipping any one of these is usually how a promising trade turns into a losing one.
Picking the right securities and managing the risk
Liquidity matters enormously here. Traders generally look for individual stocks trading at least 5 million shares a day, and they tend to avoid leveraged or inverse exchange traded funds because their price moves do not track the underlying index cleanly, thanks to how those funds are built. Regular index funds are safer but grind through smaller gains and losses than individual stocks, which somewhat defeats the purpose. Biotech names and small to midsize tech companies often become the