When it comes to investing in the stock market, everyone dreams of turning a small sum into a substantial fortune. The allure of seeing your $10,000 grow into $100,000 – or even more – is what fuels many investors’ ambitions. While traditional investing often focuses on long-term value, there’s another strategy that has helped traders achieve rapid gains: momentum investing.
Momentum investing is based on the principle that stocks that have performed well in the past are more likely to continue rising, while poorly performing stocks are likely to keep falling. By riding the wave of winning stocks, momentum investors can achieve explosive growth in their portfolios. But how does this strategy work, and how can you use it to supercharge your returns on the Australian stock market? Let’s dive in.
What Is Momentum Investing?
Momentum investing is a strategy where investors buy stocks that have exhibited strong recent performance and sell those that have performed poorly. Unlike value investing, which looks at a company’s fundamentals, momentum investing is rooted in technical analysis and focuses on price trends and market psychology.
The Key Premise of Momentum Investing
- Stocks that have been going up will continue to rise.
- Stocks that have been going down will continue to fall.
- Market trends and investor sentiment fuel price movements.
By identifying stocks that are on a strong upward trajectory, investors aim to enter the trend early and exit before the momentum fades.
The Science Behind Momentum Investing
Momentum investing is not just a speculative strategy – it is backed by decades of market research. Studies have shown that stocks that have outperformed the market over the last 3 to 12 months tend to continue their outperformance for another period of time.
Several factors contribute to momentum:
- Investor psychology: People tend to follow trends, creating a self-fulfilling cycle of buying into rising stocks.
- Institutional buying: Large funds and institutional investors often pile into high-performing stocks, further boosting momentum.
- Earnings surprises: Positive earnings reports and upgrades from analysts often sustain the upward trend of momentum stocks.
How to Spot Momentum Stocks
Not all stocks with rising prices qualify as momentum stocks. To find the best candidates, investors use key technical indicators and performance metrics:
1. Relative Strength Index (RSI)
The RSI measures how overbought or oversold a stock is. A stock with an RSI above 50 and rising often signals strong momentum.
2. Moving Averages (50-day & 200-day)
When a stock’s 50-day moving average crosses above its 200-day moving average, it forms a Golden Cross, a strong bullish momentum signal.
3. Trading Volume
A spike in trading volume confirms strong investor interest and signals sustained momentum.
4. 52-Week High Breakouts
Stocks hitting new 52-week highs often continue climbing as investors chase the trend.
Real ASX Momentum Stock Examples
Momentum investing has worked exceptionally well in the Australian market. Let’s look at three recent examples where ASX stocks demonstrated strong momentum.
1. BHP Group (ASX: BHP)
- Momentum Signal: In early 2021, BHP’s share price broke past its 52-week high, riding the surge in iron ore prices.
- Result: Investors who jumped in early saw over 40% gains in a matter of months.
2. Pilbara Minerals (ASX: PLS)
- Momentum Signal: Pilbara Minerals gained significant momentum in 2022 due to strong demand for lithium.
- Result: The stock skyrocketed from around $2 to over $5, delivering over 150% returns.
3. Wisetech Global (ASX: WTC)
- Momentum Signal: After posting strong earnings and breaking above key resistance levels, Wisetech saw massive institutional buying.
- Result: The stock surged nearly 80% in 2023, rewarding momentum investors handsomely.
The Risks of Momentum Investing
While momentum investing can deliver rapid gains, it comes with significant risks:
- Trend Reversals: Stocks that rise fast can also drop quickly. Momentum stocks can crash if the market sentiment shifts.
- Market Volatility: External factors such as economic downturns or industry shifts can break momentum trends.
- Chasing Highs: Jumping in too late means buying at the peak, leading to potential losses.
Risk Management Strategies
To minimize risks, momentum investors should:
- Set a stop-loss order to limit downside risk.
- Use a trailing stop to lock in gains while keeping upside potential.
- Diversify across multiple momentum stocks to reduce exposure.
How to Start Momentum Investing with $1,000
If you’re ready to dive into momentum investing, here’s how you can get started with a small capital base:
- Screen for Momentum Stocks – Open an account with SignalSavvyInvestor to easily find quality stocks with increasing momentum and also those former stars that are slowing. Use trading platforms like CommSec or SelfWealth to buy and sell stocks.
- Buy Small Positions – Start with a diversified basket of 3-5 momentum stocks to reduce risk.
- Set Stop-Loss Orders – Protect your capital by exiting positions if momentum fades.
- Monitor Market Trends – Stay updated on news and earnings reports that may impact stock performance.
- Scale Up When Proven – Once you build confidence, reinvest gains to grow your portfolio.
Final Thoughts: Can $1,000 Really Turn Into $10,000?
While momentum investing has the potential to deliver rapid gains, it is not a get-rich-quick scheme. It requires discipline, risk management, and strategic execution. Many investors have successfully multiplied their initial investments by following momentum strategies, but they also know when to cut losses and move on.
By understanding momentum signals, avoiding common pitfalls, and staying disciplined, you can put yourself in the best position to grow your investments quickly and efficiently. With the right approach, momentum investing could be your key to turning $1,000 into $10,000 and beyond.
Are you ready to ride the next momentum wave? Start scanning the ASX today, and make your move!
