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Momentum investing is a strategy designed to capitalize on the continuation of existing market trends. This is a trading strategy in which investors buy a security that has risen and sell it when it reaches its peak.
Momentum investing is a strategy designed to capitalize on the continuation of existing market trends. This is a trading strategy in which investors buy a security that has risen and sell it when it reaches its peak.
In markets, momentum refers to the ability of a price trend to sustain itself moving forward.
Momentum investing involves taking a long position on a stock, futures, market exchange-traded fund (ETF), or any financial instrument that shows an upward trend in price, while taking a short position on the corresponding asset as its price falls.
Momentum investing believes that trends can continue for a period of time, and it is possible to profit by continuing to follow a trend until it ends, no matter how long that may take. For example, momentum investors who entered U.S. stocks in 2009 often enjoyed the uptrend through December 2018.
Note: Although he was not the first to use the strategy, fund manager and businessman Richard Driehaus is often considered the originator of momentum investing. [1]
Momentum investing typically follows a strict set of rules that determine market entry and exit points for a given security, based on technical indicators.
Momentum investors sometimes use two longer period moving averages (MA), one slightly shorter than the other, to get trading signals. For example, some people use the 50-day and 200-day MA. In this case, a buy signal occurs when the 50-day line crosses above the 200-day line, and a sell signal occurs when the 50-day line recrosses below the 200-day line. Some momentum investors prefer to use longer-term MAs for signaling.
Another momentum investing strategy is to go long on sector ETFs with the strongest momentum, while short on sector ETFs with the weakest momentum, based on price signals, and then rotate between these sectors accordingly.
Other momentum strategies involve cross-asset analysis. For example, some stock traders pay close attention to the Treasury yield curve and use it as a momentum signal for moves in and out of stocks. A rise in the 10-year Treasury yield above the two-year yield is usually a buy signal, while a two-year yield above the 10-year yield is a sell signal. It’s worth noting that two-year and 10-year Treasury yields tend to be strong predictors of recessions, which also have an impact on the stock market.
Additionally, some strategies combine momentum factors with certain fundamental factors. One of the famous systems is CAN SLIM, founded by William O’Neill, which is famous for its emphasis on quarterly and annual earnings per share (EPS) growth. [2] One might argue that this is not really a momentum strategy, but this system generally seeks stocks with earnings and sales momentum, and tends to point to stocks that also have price momentum.
Important Note: If you plan to practice momentum investing, be sure to select the appropriate security and consider its liquidity and trading volume.
Like other momentum systems, CAN SLIM includes rules for entering and exiting stocks, based primarily on technical analysis.
Few professional investment managers use momentum investing, arguing that individual stock picking based on discounted cash flow (DCF) analysis and other fundamental factors tends to produce more predictable results and is a better way to beat index performance over the long term. As quoted in an article in the UCLA Anderson Review: "As an investment strategy, it is a refutation of the efficient markets hypothesis (EMH), one of the core tenets of modern finance."[3]
However, momentum investing has its supporters. A 1993 study published in the Journal of Finance documented that from 1965 to 1989, a strategy of buying recent winners and selling recent losers produced short-term returns that were significantly higher than the U.S. market as a whole. [4]
The more recent American Association of Individual Investors (AAII) found that CAN SLIM was able to outperform the S&P 500 and outperform over longer time frames when looking at data over the past five and ten years. [5]
In momentum trading, there are several momentum indicators that technical analysts can use. The most popular include the relative strength index (RSI), rate of change (ROC), stochastics, and moving average convergence divergence (MACD).
Generally, market momentum can be defined from the following formula:
<!-- @@@ -->Momentum traders benefit from herd mentality, greed, and fear of missing out. This could lead to a bull run that goes beyond fundamental forecasts. Fear and panic of losses can also cause a sell-off to turn into a crash.
[1] Tanous, Peter J. Investment guru: a road map to wealth from the world's best money managers. Penguin, 1999.
[2] Investors' Business Daily. "About Us."
[3] UCLA Anderson Review. "Momentum Investing: It Works, But Why?"
[4] Jegadeesh, Narasimhan, and Sheridan Titman. "Returns to buying winners and selling losers: Implications for stock market efficiency." The Journal of Finance, Vol. 48, No. 1. 1993. Pp. 65-91.
[5] Lutey, Matt, and David Rayome. "Live Out of Sample Testing of CAN SLIM Stock Selection Strategy." Journal of Accounting and Finance, Vol. 22, No. 2. 2022. Pp. 1-7.
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动量交易者受益于从众心理、贪婪和害怕错过。这可能导致牛市的上涨超出基本面预测的范围。对损失的恐惧和恐慌同样可能导致抛售变为崩盘。
[1] Tanous, Peter J. Investment gurus: a road map to wealth from the world's best money managers. Penguin, 1999.
[2] Investors' Business Daily. "About Us."
[3] UCLA Anderson Review. "Momentum Investing: It Works, But Why?"
[4] Jegadeesh, Narasimhan, and Sheridan Titman. "Returns to buying winners and selling losers: Implications for stock market efficiency." The Journal of Finance, Vol. 48, No. 1. 1993. Pp. 65-91.
[5] Lutey, Matt, and David Rayome. "Live Out of Sample Testing of CAN SLIM Stock Selection Strategy." Journal of Accounting and Finance, Vol. 22, No. 2. 2022. Pp. 1-7.
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