What is momentum investing?

There has been a lot of buzz regarding momentum investing lately, lets clear it from basics. Momentum investing is a trading strategy in which investors buy securities that are rising and sell them when they look to have peaked. The goal is to work with volatility by finding buying opportunities in short-term up trends and then sell when the securities start to lose momentum. Then, the investor takes the cash and looks for the next short-term uptrend, or buying opportunity, and repeats the process. Skilled traders understand when to enter into a position, how long to hold it for, and when to exit; they can also react to short-term, news-driven spikes or selloffs. Risks of momentum trading include moving into a position too early, closing out too late, and getting distracted and missing key trends and technical deviations. Now, the question is how it came into existence, who discovered it? Though not the first momentum investor, Richard Driehaus took the practice and made it into the strategy he used to run his funds. His philosophy was that more money could be made by "buying high and selling higher" than by buying underpriced stocks and waiting for the market to re-evaluate them. Driehaus believed in selling the losers and letting the winners ride while reinvesting the money from the losers in other stocks that were beginning to boil. Many of the techniques he used became the basics of what is now called momentum investing.

For example, say you buy a stock that grows from $50 to $75 based upon an overly positive analyst report. You then sell at a profit of 50% before the stock price corrects itself. You've made a 50% return over the course of a few weeks or months (not an annualized return). Over time, the profit potential increase using momentum investing can be staggeringly large.