Which strategy seeks to capitalize on continuing price trends?

• A. A reversal strategy
• B. A momentum strategy
• C. A hedging strategy
• D. A diversification strategy

Answer: (B)

A momentum strategy is designed to capitalize on continuing price trends in the market. This approach is based on the premise that assets that have demonstrated a strong performance in the past will continue to perform well in the future, while those that have underperformed will continue to decline.

Traders implementing a momentum strategy typically look for securities that exhibit price momentum, often focusing on technical indicators and recent price movements to identify entry and exit points. The key characteristic of this strategy is the tendency to ride the wave of price trends, whether upward or downward, rather than anticipating a reversal in price direction. This makes momentum strategies particularly effective in trending markets where certain assets may continue to see appreciation or depreciation over time.

In contrast, a reversal strategy seeks to profit from asset price movements when they appear to turn back against the trend, while hedging and diversification strategies focus on risk management and reducing the impact of volatility, rather than specifically leveraging price trends. Therefore, the focus of a momentum strategy on maintaining positions in the direction of prevailing price trends clearly distinguishes it as the appropriate answer.