Momentum Investing

What Is Momentum Investing?

Momentum investing is a strategy that plans to capitalize on the continuation of an existing market trend.

Understanding Momentum Investing

Momentum investing includes going long stocks, futures, market exchange traded funds (ETFs), or any financial instrument appearing up trending prices and short the separate assets with descending trending prices.

Momentum investing holds that trends can continue for quite a while and that it's feasible to profit by remaining with a trend until its decision, regardless of how long that might be. For instance, momentum investors that entered the U.S. stock market in 2009 generally partaken in an uptrend until December 2018.

In spite of the fact that he wasn't quick to use the strategy, fund manager and businessman Richard Driehaus is frequently credited just like the dad of momentum investing.

Momentum Investing Methods

Momentum investing typically includes keeping a severe set of rules based on technical indicators that direct market entry and exit points for specific securities.

Momentum investors at times use two longer-term moving averages (MAs), one a bit shorter than the other, for [trading signals](/exchange signal). A few use 50-day and 200-day MAs, for instance. In this case, the 50-day crossing over the 200-day makes a buy signal, while a 50-day crossing back below the 200-day makes a sell signal. A couple of momentum investors like to use even longer-term MAs for the end goal of signaling.

One more type of momentum investing strategy includes following price-based signals to go long sector ETFs with the strongest momentum, while shorting the sector ETFs with the most vulnerable momentum, then, at that point, rotating all through the sectors as needs be.

Other momentum strategies include cross-asset analysis. For instance, some equity traders closely watch the Treasury yield curve and use it as a momentum signal for equity sections and exits. A 10-year Treasury yield over the two-year yield generally is a buy signal, while a two-year yield trading over the 10-year yield is a sell signal. Strikingly, the two-year versus 10-year Treasury yields will generally be a strong predictor of downturns, and furthermore has suggestions for stock markets.

In the event that you expect to practice momentum investing, ensure you choose the appropriate securities and think about their liquidity and trading volume.

Furthermore, a few strategies include both momentum factors and some fundamental factors. One such system is CAN SLIM, made renowned by William O'Neill, founder of Investor's Business Daily. Since it stresses quarterly and annual earnings per share (EPS), some might contend it's anything but a momentum strategy, as such. Nonetheless, the system generally seeks stocks with both earnings and sales momentum and will in general point to stocks with price momentum, also.

Like other momentum systems, CAN SLIM additionally incorporates rules for when to enter and exit stocks, based essentially on technical analysis.

The Debate Over Momentum Investing

Barely any professional investment managers utilize momentum investing, accepting that individual stock picking based on an analysis of discounted cash flows (DCFs) and other fundamental factors will in general deliver more unsurprising outcomes, and is a better means of beating index performance over the long term. "As an investment strategy, it's a thumb in the eye of the efficient market hypothesis (EMH), one of the central precepts of modern finance," to quote a UCLA Anderson Review article, "Momentum Investing: It Works, But Why?" distributed Oct. 31, 2018.

In any case, momentum investing has its supporters. A 1993 study distributed in the Journal of Finance recorded how strategies of buying recent stock champs and selling recent losers produced fundamentally higher close term returns than the U.S. market overall from 1965 to 1989.

All the more recently, the American Association of Individual Investors (AAII) found that, in October 2017, CAN SLIM beat the S&P 500 in the trailing five-year and 10-year periods, and has beaten it sufficiently throughout an even longer time period.

Features

• Momentum investing is a strategy that plans to capitalize on the duration of existing trends in the market.
• Momentum investing typically includes a severe set of rules based on technical indicators that direct market entry and exit points for specific securities.
• Barely any professional investment managers utilize momentum investing, depending rather on fundamental factor and value indicators.