Momentum Strategies

Keep in mind that momentum strategies tend to lose money in choppy or directionless phases of the market. They have a small percentage of winning trades; that is, they make their money in a few big trades. This means that if you miss a big move, you may not have enough capital to hold out through the draw-down as you wait for the next big move.

Another design characteristic should be to limit your losses during the market’s sideways mode. Remember, no strategy will make money in every market condition. If the strategy is designed to make money in a trending market, it will lose money in the choppy phase. Your priority should be to minimize the losses in the directionless market.

 

All methods work sometimes and sometimes all methods work.

 

I have a momentum system that I trade off from on occasion. I have to monitor the market for the right conditions - wide swinging, and typically the system's profits and losses are a good indication of what future signals will bring. Over time the system has shown to be about break even. Can you make money trading a break even system? I have done so on a limited basis by limiting losses, and by banking profits at opportune times. In the end my strategy is to take the system signals for entry, selecting a favorable entry point, and then keeping losses small, and banking profits based on experience and tape reading. The discretionary aspects are when not to trade, selecting a good entry point based on the signal, and in managing the trade after entry. When the system is in a bad run, the signals often make good fade signals. Keeping losses small is probably the most important principle in all this. If my system were better then the results would be better as well (of course).

 

What is the definition of a momentum strategy? How do you define momentum?

 

my personal definition would be...

Placing a trade in the direction of a clearly defined trend. Example, buying a stock making new highs, the more new highs per period the more momentum.

 

In other words, 'momentum strategy' is just a "power phrase" for trend following. I'm continually amused by all the macho posturing and pseudo-scientific posing by the economystic community, the financial sub-culture being no exception to the rest of economystics in that regard.

 

To paraphrase Sam Clemens, you can use all systems some of the time and some systems all of the time, but you can't use all systems all of the time.