The conventional thought process when investing in the equity markets is to buy low and sell high, correct? What if we told you that you could buy high and sell higher? Yes. You read that correctly. Buy when a stock is at elevated levels (price-wise) and still make money.
But experts note that there is no magic wand involved in picking such success stories. It’s just plain old research, due diligence and hard work.
“Stocks hitting all-time highs often have a greater probability of continuing their upward move compared to those not making new highs,” says Arihant Bardia, CIO and Founder, Valtrust.
Have you ever noticed how sometimes a stock that’s already going up just keeps going up? Or how a struggling stock continues to fall? This is exactly the kind of movement momentum traders try to take advantage of. Momentum trading is about recognising these ongoing trends and riding the wave, according to Equiris Wealth in a blog post.
Momentum Investing: Strategy explained
Momentum trading is a strategy that focuses on buying or selling assets based on their recent price trends. It relies on a simple idea: if a security (like a stock) has been on the rise lately, it will probably keep rising, and if it’s been falling, it will probably keep falling- at least for a while.
“Traders who use this strategy aim to make a profit by following these trends, riding them as long as they can before things change,” says Equirus Wealth.
Needless to say, mistakes do happen. “Of course, failures are possible, which is why having a disciplined rebalancing strategy is critical,” says Bardia.
But, experts state that discerning such winners from the sea of listed stocks is possible. Such companies have definite characteristics that investors can look out for in their search for the upwards surge, surging still further.
“Look for a strong earnings growth,” says Ranjit Jha, MD and CEO, Rurash Financials. This means look for companies consistently delivering double-digit growth in revenue and profits.
Jha also feels that companies that have sector leadership will soar even if the equity prices are at high levels. “Market leaders with competitive moats often justify higher valuations. This means stocks that enjoy a monopoly or duopoly in their respective segment,” he says.
Upgrades in earnings estimates or target prices by brokerages are another indicator that stocks may outperform even if their levels are high.
Another factor for upward momentum is strong buying from FIIs, DIIs, and mutual funds, indicating continued confidence and may also boost a stock’s levels.
“Momentum traders don’t worry about guessing when a trend will end—they simply follow along while it lasts,” according to data from Equirus Wealth, who note that if this is played correctly, then there is a possibility of profits in a short period of time.
Do remember that the reverse holds true. This strategy can be risky, especially if trends suddenly reverse due to unexpected news or events.
Momentum trading requires quick action, constant monitoring, and emotional discipline- it’s not for those who hesitate or get easily stressed, say experts.
Fortunately, experts have noted down the characteristics that will allow the investor to discern whether a stock on an upward trend will still go further. How can investors evaluate whether the upward revision is fundamental or sentiment-driven?
From the fundamental side of the analysis are the characteristics are rising EPS, revenue growth, and expanding market share. Also, clear drivers like policy reforms, product launches, capex cycles also signal trend shift.
But, yes, sentiments also drive stock growth, and sentiment in the markets is not always a good thing.
Upward revision in stocks without fundamental justification includes a price rise without earnings growth; frenzy around “themes” (EV, AI, renewable, etc.) without concrete business backing.
Finally, Over-inflated P/E multiples compared to peers.
“The rule of thumb is if earnings don’t catch up with price, it’s likely sentiment,” says Jha.
In momentum investing, too, as in any aspect of the equity markets, you have MFs to help those who want to take advantage of the momentum strategy, but do not have the time or the inclination to do the research.
The MF types that invest or take advantage of the momentum theme include Quant Funds (quantitative/momentum-based), Thematic/Factor-Based Funds (like Smart Beta, Momentum Funds) and Index Funds tracking Momentum indices.
Before investing in momentum-based MFs, look for the following points.
- Look at Expense Ratios as Quant and factor-based funds often have higher costs, vis-à-vis other MF categories.
- Look for consistency or check if the fund has consistently delivered vis-à-vis the benchmark.
- Finally, be prepared for volatility. Expect a higher churn and volatility compared to the broad-market index.
The market is always forward-looking. “If research reveals upcoming changes likely to boost earnings, and the stock rallies in line with those expectations, the move can be seen as fundamentally driven,” says Bardia.
Momentum trading can be a powerful strategy, but it’s not for everyone. It requires staying on top of market trends, making swift decisions, and understanding when to exit, according to Equirus Wealth.
Momentum investing isn’t about chasing random highs. It’s about recognising when fundamentals + sentiment + trend align to justify further upside. “Retail investors must couple basic valuation checks with an awareness of market psychology—and avoid confusing ‘hype’ with ‘momentum’,” says Jha.
How to check momentum in a stock?
Retail investors can look for the following characteristics to discern if a stock still has upward momentum.
• Price + Volume Confirmation: Rising prices on increasing volumes is a bullish sign.
• Trend Analysis: Moving averages (50-DMA, 200-DMA) trending upward confirm momentum.
• Relative Strength Index (RSI): Stocks with RSI between 60–80 may still have headroom; over 80 signals overheating.
• Market Sentiment: News flow, management commentary, and sector tailwinds can sustain rallies. – Rurash Financials.
Ratios or software?
“Investors don’t necessarily need complex software—basic readings work,” says Jha.
o P/E Ratio: Compare with sector averages. Extremely high P/Es need earnings support. P/E is an acronym for Price to Earnings ratio.
o EPS Growth: If EPS (earnings per share) is rising faster than price, upside may remain.
o PEG Ratio (P/E ÷ EPS Growth): A PEG below 1 often indicates value even at high prices.
o Price-to-Sales, Price-to-Book: Useful in sectors where earnings are volatile.
• “Also software tools (like Bloomberg, TradingView, Screener.in) add convenience, but disciplined use of fundamentals + technicals can also guide investors,” says Jha.
What are the indices in Indian bourses that track momentum?
• Nifty200 Momentum 30 Index (popular for momentum strategy).
• Nifty Alpha 50 Index (stocks with strong alpha/momentum characteristics).
• Nifty 100/500 thematic indices (sometimes tilted toward momentum-heavy sectors).
Momentum indices undergo frequent rebalancing, which leads to high churn, which translates to higher costs.
Past outperformance is no guarantee for future performance. Momentum works in trending markets, but can underperform in volatile or sideways phases.
“They can become sector-heavy (e.g., overweight IT or BFSI), which increases concentration risk,” says Jha.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
