Mark Hulbert, Wall Street Journal, suggests that investors shouldn’t give up on momentum investing here…
“With a momentum strategy, the investor favors stocks with the best trailing-12-months returns and shuns those that have performed worst. Some of those approaches explicitly base their strategies on price movements, while others do so implicitly by focusing on factors such as earnings momentum, trends in analyst revisions and so forth. But anyone who sells their losers and holds on to their winners is at least partly a momentum investor.”
“The past 10 years have been frustrating for followers of this approach. According to data compiled by Eugene Fama, a finance professor at the University of Chicago Booth School of Business, and Kenneth French, a finance professor at Dartmouth College’s Tuck School of Business, the decile of stocks with the highest momentum beat the S&P 500 by just 1.3 percentage points over the 10 years through March 31 of this year (before transaction costs). That is less than one-fifth as much as the strategy’s average annual advantage over the past 90 years, and almost certainly not enough to pay the considerable expenses—both brokerage commissions and bid-offer spreads—involved in the high turnover of a momentum portfolio.”
Do read the whole thing…
A commodity trader might have a different definition and perspective of what momentum trading is… For example, a momentum trading rule might be “buy (sell) when the 5 day moving average breaks over (under) the 20 day average”… High frequency trading systems can break this rule down from days to minutes (5 minute vs. 20 minute price average) or even seconds… These rules try to get a trader in position for an accelerating move, often in a market moving from low volatility to high volatility… Also, commodity traders are indifferent to buying or selling… Over the last 10 years some big moves in markets have been to the downside… A momentum trader likely did well when oil moved from $100 to $50 in 2014, and during the stock market crash in 2008 (using Stock index futures)… Momentum trades don’t work well in sideways, choppy markets because of all the false buy/sell signals generated…
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