Momentum Trading Works
By Douglas Chadwick, Chairman, Saltydog Investor Ltd well, and which are the best performing funds within these sectors. For those that might suffer from number blindness the information is also presented in graph form. The homework has been done and the findings are presented to you on a silver platter.
Although it has its critics, it`s generally accepted that momentum trading works. It is widely used by professional investors as well as legendary historic figures from the past. The theory of Momentum Trading, like all the best ideas, is simple - the greater the amount of money that is being invested into a fund, or asset class, the quicker its value will rise. This in turn will attract further investment, pushing the price even higher. Obviously, the opposite also applies. As a fund or asset class loses investors, the upward momentum ceases and it will reverse, gaining impetus in the opposite direction. Time to move your money and exit stage left!
Jesse Livermore In the summer of 1891 a fourteen-year-old farmer`s son ran away from home with five dollars in his pocket. Thirty-eight years later, having spent his entire adult life as an investor and trader, he was worth over $100million - equivalent to $1.3billion in today`s money. His name was Jesse Livermore, and his immense success was largely due to one investment strategy - momentum trading. This remains just as effective today as it was one hundred years ago.
Richard Dennis and the ‘turtles’ Another successful momentum investor was a man called Richard Dennis. He was born in Chicago in 1949 and in the early 1970s started to trade commodities with a small loan from his family. By 1973 this had risen to $100,000 and by 1975 he was a millionaire. By the early eighties he was said to be worth more than $100million. It was at this time that he and his long-term friend, the financial genius Bill Eckhardt made a bet – that any sensible person with training and a supply of relevant financial
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To make the most of your investments you need to follow a few simple steps:
information could become a successful momentum trader. It goes without saying that Dennis won his bet. He selected twenty or so novices (‘Turtles’) gave them $1million each and let them loose. Three years later their combined value was $175million.
How to ‘Do it yourself’ The same momentum principles underpin the Saltydog philosophy and our approach to investing. At Saltydog Investor we do not believe that people should necessarily work longer, pay more into their pensions, or take out extra insurance in order to cover their living expenses during their twilight years. These are all the things that are currently being advocated by politicians and the financial industry and which well might be necessary for some; but why oh why doesn`t anyone suggest the obvious make your current savings work harder! To become a D.I.Y. investor with some of your money (whilst you learn) you will need a source of clear well presented fund and asset sector performance data. At Saltydog we analyse thousands of funds and present a summary on a weekly basis in a way designed to help private investors see which sectors are currently performing
• Take advantage of the low–cost fund supermarkets and discount brokers. You need access to their wide selection of funds and to be able to switch, buy and sell without it costing you an arm and a leg. • Use tax-efficient wrappers like ISAs, SIPPs and Investment Bonds. The government has set up various schemes to encourage us to save more and it is important to take advantage of these offerings. • Manage risk. By understanding how different funds are classified it is possible to tailor your portfolio to match your own appetite for adventure. • Monitor your progress and be prepared to change tack as conditions vary. We combine the Investment Association Asset sectors into our own proprietary Saltydog Groups which are: • Safe Haven. • Slow Ahead. • Steady as She Goes. • Full Steam Ahead-Developed Markets. • Full Steam Ahead- Emerging Markets. The nautical names of these groups give an easily recognisable indication of the volatility of the sectors and funds