Momentum trading is often supported by theories from behavioural finance, the branch of science that looks at how psychology plays a part in financial decision-making, and hence market outcomes.<\/p>\n
Unlike traditional finance theory, which assumes that investors are rational, behavioural finance scientists believe human beings are subject to a variety of biases and emotions that can impact their financial choices.<\/p>\n
When it comes to momentum trading<\/strong> \u2013 a strategy that involves buying when a stock price is trending up \u2013 scientists believe that human behavior and cognitive biases are the main factors why the strategy has been so successful.<\/p>\n There is something called \u201cherding behaviour\u201d<\/strong> \u2013 which refers to the tendency of investors to follow the crowd.<\/p>\n \u201cInvestors often buy stocks that are popular among other investors, regardless of their intrinsic value,\u201d said a report from Faster Capital.<\/em><\/p>\n This behavior is driven by the fear of missing out (FOMO)<\/strong>, and the desire to conform to social norms.<\/p>\n \u201cFor example, if a stock is trending upwards and everyone is talking about it, investors may feel compelled to buy it to avoid missing out on potential profits,\u201d said the broker.<\/p>\n Another reason why momentum strategy has worked so well, from a psychological point of view, is what\u2019s called Confirmation Bias.<\/strong><\/p>\n This refers to the tendency of investors to seek out information that confirms their beliefs, and ignore information that contradicts them.<\/p>\n \u201cInvestors who believe that a stock will continue to perform well are more likely to buy it, even if there is evidence to suggest otherwise. This bias can lead investors to overlook important information and make poor investment decisions,\u201d said Faster Capital.<\/p>\n At the end of the day, the goal of trading is to make money.<\/p>\n For momentum traders, they make money by entering into trades at key points in the upward trend in order to maximise profits.<\/p>\n Fortunately, there are several indicators to quantify those key points, and here we look at three main signals used by the market:<\/p>\n 52-week high<\/strong> \u00a0<\/p>\n Traders often view the\u00a052-week highs\u00a0as entry signals.<\/p>\n This is due what\u2019s called the \u201c52-week high effect\u201d<\/strong> \u2013 where if \u00a0a price has broken out above its 52-week range, there must be some factor that generated enough momentum to further continue the price movement in the same direction.<\/p>\n On the other hand, if a stock is far away from its 52-week high, chartists believe the momentum will continue going that way.<\/p>\n \u00a0<\/p>\n 10 ASX small caps at 52-week high<\/strong> Code Name Price How far from 52-Week High? 1 mth return 6 mth return 12 mth return EVE Eve Health Group $0.00 0.00% 0.00% 0.00% 0.00% AEI Aeris Environmental $0.05 0.00% 25.00% 78.57% 25.00% AMO Ambertech $0.29 0.00% 11.54% 23.40% 7.41% CUE Cue Energy $0.10 0.00% 49.25% 53.85% 47.06% CXZ Connexion Mobility $0.03 0.00% 30.00% 8.33% 44.44% VPR Volt Power $0.00 0.00% 100.00% 100.00% 0.00% AAP Australian Agricultural $0.02 0.00% 29.41% 10.00% 37.50% DCC Digitalx $0.07 0.00% 38.78% 88.89% 83.78% TCG Turaco Gold $0.14 0.00% 21.74% 145.61% 115.38% NOR Norwood Systems $0.04 0.00% 18.92% 25.71% 69.23% <\/p>\n WordPress Table Plugin<\/a><\/p>\n \u00a0<\/p>\n Cue Energy (ASX:CUE)<\/a><\/strong><\/p>\n CUE has been rising since signing a gas supply agreement (GSA) with Arafura Rare Earths\u2019 (ASX:ARU) subsidiary, Arafura Nolans Project, for up to 6.85 Petajoules of gas o be supplied to Arafura for up to five years from 2026.<\/p>\n This includes a two-year extension period which is subject to sufficient un-contracted reserves being available. The GSA is conditional on various conditions precedent being satisfied by Arafura by 30 June.<\/p>\n The GSA is for firm gas supply, with take-or-pay provisions and a fixed price that escalates with the consumer price index.<\/p>\n \u00a0<\/p>\n Bisalloy Steel (ASX:BIS)<\/a><\/strong><\/p>\n Group revenues in H1 were $76.6m, down 2.3% from the pcp, impacted by Indonesian import restrictions.<\/p>\n Profit before tax was $12.1m, up 18.1% from the pcp, reflecting improved margins driven by favourable product mix.<\/p>\n Bisalloy says its current order book indicates that H2 FY24 will maintain the strong profit momentum delivered in H1, with an anticipated move towards normalisation of product margins in the second half which will be moderated by lower energy and transportation costs.<\/p>\n \u00a0<\/p>\n Simple Moving Averages (or SMA)<\/strong>\u00a0is another indicator that can be used to gauge momentum.<\/p>\n SMA is often used to determine whether a stock price will continue in the same direction, or if it will reverse a bull or bear trend.<\/p>\n As a general rule, if the current stock price is above the SMA, the price trend is up. If the price is below the SMA,\u00a0the trend is down.<\/p>\n 10 ASX small caps at prices above SMA<\/strong> Code Name Last Price Value Price vs. Simple Moving Average Price vs. 20 day SMA Price vs. 50 day SMA Price vs. 200 day SMA ADN Andromeda Metals $0.03 >5% Above SMA >5% Above SMA >5% Above SMA 0 to -1% Below SMA AEI Aeris Environmental $0.05 >5% Above SMA 1 to 5% Above SMA >5% Above SMA >5% Above SMA BP8 BPH Global $0.00 >5% Above SMA >5% Above SMA >5% Above SMA — AGY Argosy Minerals $0.13 >5% Above SMA >5% Above SMA >5% Above SMA < -5% Below SMA BIS Bisalloy Steel Group $2.81 >5% Above SMA 1 to 5% Above SMA >5% Above SMA >5% Above SMA AJL AJ Lucas Group $0.01 >5% Above SMA >5% Above SMA >5% Above SMA 1 to 5% Above SMA AMO Ambertech $0.29 >5% Above SMA 1 to 5% Above SMA >5% Above SMA >5% Above SMA PER Percheron Therapeutics $0.09 >5% Above SMA >5% Above SMA >5% Above SMA >5% Above SMA ASP Aspermont $0.01 >5% Above SMA >5% Above SMA 1 to 5% Above SMA < -5% Below SMA TD1 TALI Digital $0.00 >5% Above SMA >5% Above SMA >5% Above SMA < -5% Below SMA <\/p>\n WordPress Table Plugin<\/a><\/p>\n \u00a0<\/p>\n Ambertech (ASX:AMO)<\/a><\/strong><\/p>\n The distributor of audio-visual solutions announced $50.9 million in revenue in H1, with growth of 25.6%.<\/p>\n The company recorded strong improvement in EBITDA, with an 80% increase on pcp to $3.6 million.<\/p>\n A fully franked interim dividend was declared at 1.2 cents per share, a 140% increase on pcp.<\/p>\n In terms of outlook, Ambertech said the strong start to the second half gives the board confidence that the business can continue to grow and maintain a dividend of greater than 50% of the full year result.<\/p>\n \u00a0<\/p>\n BPH Global (ASX:BP8)<\/a><\/strong><\/p>\n BPH has recently entered into two new agreements with the China Tobacco group, for the sale and distribution of bird\u2019s nest products via China Tobacco\u2019s outlets in the City of Guangzhou in China for calendar year 2024.<\/p>\n The principal terms of the agreements include: Commencement date 1 January 2024 with a term 12 months.<\/p>\n Products to be supplied include: pure bird\u2019s nest 50g box, and bird\u2019s nest drink.<\/p>\n Guangzhou is at the heart of the Guangdong-Hong Kong-Macau Greater Bay Area, the most populous built-up metropolitan area in the world.<\/p>\n \u00a0<\/p>\n Here\u2019s another momentum signal used by the market \u2013 the Relative Strength Index (RSI)<\/strong>.<\/p>\n RSI is a measure of the strength of a stock\u2019s momentum, either in the upward or the downward direction, and is used to indicate whether a stock is oversold or undersold.<\/p>\n Generally speaking, an RSI above 70 means a stock is overbought; and an RSI below 30 indicates that it\u2019s oversold.<\/p>\n An RSI above 80 meanwhile is strongly overbought, and an RSI below 20 is strongly oversold.<\/p>\n 10 ASX small caps at prices with RSI Oversold signal<\/strong> Code Name 2 Day RSI 9 Day RSI 14 Day RSI AAR Astral Resources NL — Oversold — ALK Alkane Resources — Oversold — A1N ARN Media — Oversold — CVN Carnarvon Energy Oversold Oversold — RMI Resource Mining — Oversold — EME Energy Metals — Oversold — CMD Cassius Mining — Oversold Oversold LOM Lucapa Diamond Oversold Oversold Oversold NME Nex Metals Oversold Oversold — AFG Australian Finance Oversold Oversold — <\/p>\n WordPress Table Plugin<\/a><\/p>\n \u00a0<\/p>\n NEX Metals (ASX:NXM)<\/a><\/strong><\/p>\n NEX reported the Warden\u2019s court decision, and said that Warden has handed down the judgment in the long running applications for forfeiture on Yundamindera tenements.<\/p>\n The Warden found that the company has not complied with expenditure conditions but not of sufficient gravity to justify forfeiture.<\/p>\n A total fine of $30,500 has been imposed on the company.<\/p>\n The Yundamindra tenements form part of Nex \u2013 Metalicity (ASX:MCT) joint venture \u2013 where Metalicity owns 80% and Nex 20%.<\/p>\n \u00a0<\/p>\n Lucapa Diamond (ASX:LOM)<\/a><\/strong><\/p>\n Revenue for the full year FY23 was up 3% to US$49.9m.<\/p>\n Lucapa reported loss after tax of US$9.1m, down 12% from loss of US$10.3m in FY22.<\/p>\n Average price per carat sold in FY23 was US$1,682, versus US$1,576 in FY22.<\/p>\n \u00a0<\/p>\n <\/span><\/p>\n The post Hot Money Monday: Herd mentality and FOMO linked to why momentum trading is such a success<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"
\nSimple Moving Average<\/strong>
\nRelative Strength Index<\/strong><\/p>\n10 ASX small caps nearest or at 52-week highs<\/h2>\n
\n(data from Commsec)<\/strong><\/p>\n10 ASX small caps with prices above SMA<\/h2>\n
\n(data from Commsec)<\/strong><\/p>\n10 ASX small caps with low RSI (Oversold)<\/h2>\n
\n(data from Commsec)<\/strong><\/p>\n