In recent years, momentum trading has attracted more traders. In momentum trading, traders trade on a stock that has already been moving and tend to move in the same direction for some time. While momentum trading works across all market segments, Indian traders observed that it has high effectiveness in the Indian midcap sector.
With this blog, we will try to understand why the momentum thrives particularly in midcaps.
What Is Momentum Trading?
Momentum trading is nothing but buying stocks that are in an uptrend and selling stocks that are in a downtrend, assuming that the trend will continue. Traders typically use:
- Price breakouts
- Moving averages (20/50/200 EMA)
- Relative Strength (RS) rankings
- Volume and volatility confirmations
This strategy has gained popularity in the Indian market because of its simplicity.
Factors that Increase the Effectiveness of Momentum in Mid-caps
Midcaps sit exactly between stability and growth. They are large enough to avoid extreme volatility and small enough to offer superior upside. This makes them the ideal candidates for momentum traders. Let’s explore the key reasons why this strategy is particularly effective for Indian midcaps.
1. Liquidity-Volatility Balance
Large-cap stocks move slowly because institutions heavily trade them, while small-caps move too quickly and unpredictably due to low liquidity. On the other hand, Midcaps have sufficient liquidity to form clean trends and enough volatility to give meaningful moves. It increases predictability and gives longer moves.
2. Faster Reaction to Growth Triggers
Mid-caps growth rate is higher than that of large caps, and they also experience rapid expansion. So when any positive news breaks out, for example, earnings release, sector tailwind, order wins, etc., midcaps react faster and stronger compared to largecaps.
3. Limited Analyst Coverage Creates Inefficiencies
Large caps are extensively tracked. Any news gets immediately priced in. Midcaps, however, have less institutional and analyst attention compared to large cap stocks, due to which, price trends form early and last longer. Also, mispricing takes time to correct. Momentum traders thrive in such inefficiency pockets.
4. Strong Participation from Retail Traders
In past years, retail trading has significantly increased in the Indian stock market. Retailers generally chase strong performers, which feeds momentum further. Also, midcaps offers relatively higher growth than large caps and lower risk than small caps, and are more affordable than the large caps. This heavily attracts retail traders. Retail participation strengthens sustained price movement.
5. Institutional Money Flow
Once midcaps reach a certain size, institutions step in. Because of their gradual accumulation, they form:
- Predictable uptrends,
- Cleaner price structure,
- Multi-week to multi-month momentum phases
Retail excitement and institutional accumulation combine to create a powerful momentum.
How to Build a Midcap Momentum Strategy
A straightforward way to approach midcap momentum is to break the process into a few checks:
- Start by looking for high momentum stocks that are already showing stronger price behaviour than the market. Traders use available screener for Indian stocks to capture such stocks.
- Make sure the stock trades with enough volume so that you can get in and out without trouble.
- Confirm trend using moving averages or price breakouts.
- Enter only when strong volume confirms the trend.
- Use stop losses using the indicators like ATR to manage volatility.
- Rebalance weekly or monthly.
Conclusion
Midcap stocks in India offer significant growth potential but come with challenges like inefficiency, volatility, and liquidity. These characteristics make them ideal for momentum trading strategies. However, understand the risks involved before investing.
