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Chapter 7: Momentum > Sharemarket momentum

Sharemarket momentum

No doubt you’re wondering what relevance physical momentum has to the sharemarket. The connection comes about because share prices appear to exhibit momentum and obey Newton’s law in a similar way to a physical body. Like a physical body, price resists a change in its state and will continue sidedrifting or moving up or down in the trend unless there’s a change in sentiment that causes a change in momentum.

The sharemarket is transparent; anyone can access the internet to see orders that have transacted, with price and volume, as well as orders that haven’t yet transacted. As I’ve pointed out in previous chapters, it’s usually best to go with an established trend because it’s a less risky strategy than going against it. There may be some traders who trade against a trend (contrarians) but they’re in the minority, so once a trend develops it tends to gather pace and continue moving in the same direction with continuing momentum. The concept of momentum in the sharemarket applies to individual shares and also to the market as a whole.


  

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