Is momentum investing good? (2024)

Is momentum investing good?

But a new group of studies has indicated that momentum investing is actually a viable long-term investment strategy and has performed admirably over longer periods of time.

In short, momentum trading is risky. Citing statistical data, Professor Damodaran further explains that, "Momentum stocks have an average beta almost twice that of the rest of the market ... and are much more volatile." The problem is that this process works both ways.

The field of momentum is extremely large and highly-profitable. In fact, a look at historical performance shows that momentum traders make more money than other types of investors.

Momentum measures the velocity of price changes as opposed to the actual price levels themselves. Momentum is measured by continually taking price differences for a fixed time period. To create a 10 day period momentum line you would subtract the closing price from 10 days ago from the last closing price.

But a new group of studies has indicated that momentum investing is actually a viable long-term investment strategy and has performed admirably over longer periods of time.

Broadly, there are two methods for exiting momentum. The first is simple: Exit when momentum starts to fade. Compare the stock's move against its peers (sector or even index) and when it no longer hits the top decile of the list, start to reduce size or just exit entirely.

Momentum investing can work, but it may not be practical for all investors. As an individual investor, practicing momentum investing will most likely lead to overall portfolio losses.

Over the years momentum trading strategies have proved to be profitable in the financial markets. In practice, momentum trading is seen to be more popular than “buying low and selling high”. This is because you buy an asset which is already moving up.

What are examples of momentum stocks?

High Momentum ETFs seek out stocks that are gaining momentum on Wall Street. The compositions of these funds will change quite often over time, as stocks fall in and out of favor with investors.

When the market rallies, momentum stocks are usually better placed to lead the market and touch new highs. Typically, the strategy involves capitalising on an existing trend. So, one would try to lock in gains by riding hot stocks, those that are already witnessing a surge in prices, or momentum.

History. Researchers have identified persistent momentum trends in stock markets as far back as the Victorian Era (ca. 1830s to 1900). Richard Driehaus (1942-2021) is sometimes considered the father of momentum investing but the strategy can be traced back before Donchian.

What Is Momentum? Momentum is the rate of acceleration of a security's price—that is, the speed at which the price is changing. Momentum trading is a strategy that seeks to capitalize on momentum to enter a trend as it is picking up steam.

Earnings momentum is practised by some schemes such as Motilal Oswal Flexicap Fund and these can be the core of an MF portfolio. Price momentum, however, is riskier and should not be practised for mid- and small-caps.

Whereas momentum strategies focus on following the current trends of an asset, swing trading​ takes a different approach to this. Instead, swing traders trade within ranges and tend to focus on buying and selling at support and resistance levels.