Momentum trading is the never ending hunt for high velocity moves of huge volatility stocks. It could be conducted as trend following or breakout trading. Reading the news and hammer in the next buy order before everyone also does it may also work. But combined with value investing? This sort of boring thing that relentlessly requires the investor to hunt through earnings reports, mountains of numbers and paper? What a different type of hunt!
Value investing doesn’t have to rely on static value and value trading doesn’t mean buying oversold situations on a purely technical basis. The typical value investor may search thousands of reports, analyst opinions and fundamental numbers in databases for the most undervalued stocks there are, but you could also look for value at the obvious places.
These are of course growth stocks. Their value isn’t an undervaluation of static value, but a misinterpretation of their potential. Of course, this can come along with a sour market that held prices back for a while.
The value trading system is a combination of trading and investing. First you would have to find growth stocks with products that may have a game-changing future. In a second selection look at their price. It is important that they are not priced to perfection. A company that grew during the last years constantly will most likely have a high or too high earnings multiple. It can of course go ahead with its growth and its chart can resemble that continuity with a long running trend. But chances are that the smallest stumble of the company will kill the stock trend and the valuation.
This is of course one of the situations the value momentum trader is looking for. A stock that has still theoretical potential – and what else than theoretical is potential anyway? The growth of the company hasn’t necessarily ended, it may just have paused. The other typical situation for finding undervaluation is a bear market. Good stocks in a terrible market mood will result in sad prices.
In short, look for growth potential that is relatively cheap in case things start going again like they did in the past. Now to the technical part. Just do what momentum traders like to do. Wait for the first breakout. Try to get on an emerging trend. Hit the news you have been awaiting for so long.
The difference is not made by a better trading setup in the short run. It is the few huge outlier gains you will reap with this trading method. Or is it more an investing system?