Momentum

[Anonymous]

Hi everyone,

For those looking at momentum models, I found this article very interesting. They discuss and model the added benefits of assessing ‘quality momentum’ over just straight momentum.

With Clenow’s method, adjusting the slope for R squared does this. However, I would be interested in knowing what methods anyone else is using to assess the quality of momentum with other momentum measures, such as rate of change (ROC)?

http://blog.alphaarchitect.com/2015/12/01/quantitative-momentum-investing-philosophy/

Regards

Oliver

[SaidBitar]

Hi

I use ROC and I filter any ROC < 0

[Nick Radge]

Doesn’t look like he’s filtering the individual stocks or symbols either.

[JulianCohen]

I’m a little confused over the difference between a trend following system and a momentum system. Would someone mind explaining please?

[SaidBitar]

Maybe Nick or Craig or anyone else can give much better explanation but i will say my observations.

they are two faces for the same coin.

the main difference that i felt between them is the trade management and the exits, in TF you jump on a stock that is showing some momentum and you have your trailing stop that will take you out of it. So you are in the trade as long as the price does not close bellow your trailing stop. While in Momentum you are in the trade because it is showing momentum and you exit it if it stopped showing it for example you are buying the top 20 so as long as your stock is in the top 20 list it is in the portfolio the moment it is out then it will go out of the portfolio.

another thing i noticed is the holding period is shorter with the momentum because the stock should be in the top 20 for several months in a row for you to hold it for a longer time, while in TF system you are giving the stock time to go up and then move sideways then go up and so on. This is good and bad, the good is that you are pumping new blood to the portfolio all the time the bad is that there is not enough time for the stock to go up in a healthy way somehow we are chasing it.

[Nick Radge]

There is a distinct difference between the two, although as Said says they’re two faces of the same coin. That coin is cutting losses and letting profits run by buying strength and selling weakness.However,

Trend Following
Signals are generated based on the stocks (symbol) attributes on its own. Is MSFT trending up? If yes, buy. If no, sell or stay clear. The trending attributes can be decided by any means, Bollinger Breakout, highest high breakout etc, but these attributes are single symbol related only.

Momentum
Signals are generated based on the relative strength of the symbol compared to other symbols in the universe. Is MSFT showing strong momentum than other stocks in the NASDAQ? If yes, buy. If no, leave it alone. The driver of momentum can be many things, such as rate of change between today and n-period ago, price strength, earnings growth etc etc. If we assume rate of change we would rank all stocks in the NASDAQ from strongest to weakest. We would buy the top 20 strongest then repeat every y-period. If a stock falls out of the top 20 ranks it is sold and replaced by another that within the top 20.

Suggested reading on Momentum:
Following The Trend – Andreas Clenow
Dual Momentum – Gary Antonacci

[JulianCohen]

Thanks a lot Said and Nick. Perfect explanations

[Author]

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