Momentum investing is not a buy-and-hold strategy.  Momentum investors typically hold a stock for a few hours, days or months. They do however, monitor their holdings daily and sometimes sell much sooner than they expect to.  Momentum stocks are the stocks that are going up the fastest.

Once a momentum trader sees an acceleration in a stock's price, earnings, or revenues, the trader will often take a long or short position in the stock with the hope that its momentum will continue in either an upwards or downwards direction aiming to sell when the momentum is played out and the stock begins either to level out or to fall down in value.  This strategy relies more on short-term movements in price rather then taking the long view of the fundamental particulars of a company or industry, and is not recommended for novices.

So, what do you look for in a momentum stock?  Three things, typically: a strong price chart, rapid earnings growth and recent positive changes in earnings-growth forecasts.  Generally, momentum traders do not spend much time scrutinizing fundamentals, but smart ones do add basics such as profitability and sales growth into the mix.  Knowing the right time to enter a stock may not turn out to be as difficult as is knowing the right time to get out.  It needs to be understood that momentum stocks will get trampled badly if anything at all goes wrong. The Pros tend to think of it this way:  Momentum stocks on a rip are "priced to perfection".  Therefore, traders in such stocks must act quickly to get out at the first hint of imperfection.

What causes stock momentum

While the existence of stock momentum is well accepted, the reasons behind it are often debated. It is often said that the primary cause of momentum in stocks is a psychological tendency of investors to hold on to the losing stocks too long and to sell the winners too soon.  This acts as a trigger for momentum.  Actually what happens is that the price of a stock may go down because of some bad news relating to the company.  But there are investors who do not wish to sell their holdings at a loss.  These stockholders keep holding on to their stocks hoping to exit when the price will rise later.  However if too many persons are of this opinion and continue to hold on to their Momentum Stocks then the stock price will not truly reflect the bad news that it should.  When this happens some investors note that this stock is overvalued and so begin to sell the it short (bet against it), assuming that prices will fall shortly.  This cycle will push prices of the stock down thus creating the downward momentum effect.  In other words, everything that was supposed to happen before, slowly across time instead happens all at once, and WHOOSH! the stock takes a big hit in one day.

The very same thing happens in reverse when some good news propels the share price of a particular stock higher.  Many investors will decide on selling to capture the gains.  If this happens too fast the prices will not rise to the level it should in consideration of the good news, so the stock stays undervalued for a temporary period of time until the selling abates. This will make attract new investors like a magnet and they come in creating the next upward wave of momentum.

Conclusion

One needs to understand the market, be ready to do a certain amount of work, study and analysis and always be alert as to when to enter and more important when to exit any momentum stock. We live in an age where the flow of information is round-the-clock, and almost frictionless.  It is information that moves all financial instruments.  When people are bombarded with so much information as such it motivates them to try to use it to make a profit, and when so many people go forward and act on the same information it creates a wave.  You have tons of people piling into one single idea at the same time with an intent to do the same thing.  This creates an instant imbalance and any imbalace is going to create market momentum.  It is well known that risk and reward go hand in hand. If you are aiming high then you must accept high risks.  If you are unsure of your ability or capability to take on such risks, then you should be satisfied with low return, or find somebody that you can trust who can trade for you.

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