Myths of Momentum | Momentum Trading Strategies | Quantra Courses

Published on October 1, 2020

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Timestamp:
00:11 – 02:42 – Common myths

Welcome to this video lesson on myths of momentum.
After completing this, you will be able to list and explain common myths related to momentum. The common myths of momentum are shown on the screen.

The first myth is momentum returns are small and sporadic Critics of momentum investing have always tried to downplay its effectiveness.
You will find that momentum can last from as little as days to as long as years.

According to research by the Journal of Portfolio Management, Momentum investing was the most profitable. It beat the following strategies:
RMRF: A portfolio of all stocks in the market minus the risk-free interest rate
SMB: Going long on small stocks and short on big stocks
HML: Going long on high book-to-price stocks and short low book-to-price stocks Mom is momentum investing which goes long stocks with high past year returns.

And short stocks with low past year returns. You can clearly see that momentum is more consistent than other styles of investing.

The second myth is momentum is only on the short side. It is generally believed that momentum beats a long-only investor due to more bets on the short side returns.

To check if this was true, the momentum strategy was split into two categories, going long on winners and going short on losers.

What do you think the results would be?
The results showed that both long side returns and short side returns contribute equally to the momentum strategy.
Contrary to myth, the long side is more profitable than the short side.

The third myth is momentum is stronger in small caps than large caps It turns out that the returns from small caps are larger than the returns from large caps.
But the magnitude is exaggerated.

The next myth is if everyone knows about momentum, you cannot profit from it You must be thinking that if research says that omentum always wins, traders will latch on to it. And if everybody knows a secret, then there is no secret, hence, no gains.

One of the famous papers on momentum was done by Jegadeesh and Titman in 1993.
Jegadeesh and Titman had a testing period from 1965 to 1990.
Hence, HIMCO tried the momentum strategy on Russell 3000 in two parts.

One part was the period 1927 to 1965. Another was 1990 to 2016. It seemed that the returns from the momentum strategy were almost similar.

In the next section, you will learn the herding effect, which is one of the reasons that causes momentum.

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Myths of Momentum | Momentum Trading Strategies | Quantra Courses, A-best-of-momentum-trading-strategy

A-best-of-momentum-trading-strategy, Myths of Momentum | Momentum Trading Strategies | Quantra Courses.

Momentum Indicators

The Momentum indicator is an usual tool used for establishing the Momentum of a certain asset. They are graphic tools, often in the form of oscillators that can demonstrate how rapidly the rate of a given asset is moving in a certain direction, in addition to whether the rate movement is likely to continue its trajectory.

The idea behind the tool is that as a property is traded, the speed of the rate movement reaches a maximum when the entry of new financiers or cash into a certain profession nears its top. When there is much less potential new financial investment readily available, the tendency after the top is for the rate pattern to squash or turn around direction.

Exactly how do you know if a supply is short term?

The general suggestion is to show whether a supply is trending upwards or downward. Typically, a great prospect will have a moving standard that is sloping upwards. If you are seeking a great supply to brief, you typically intend to locate one with a moving standard that is flattening out or declining.

The direction of Momentum, in a basic fashion, can be determined by deducting a previous rate from a current rate. A positive result is a signal of positive Momentum, while an adverse result is a signal of an adverse Momentum.

Momentum devices commonly look like rate-of-change (ROC) signs, which divide the Momentum result by an earlier rate. Multiplying this overall by 100, investors can locate a percent ROC to story highs and lows in trends on a chart. As the ROC approaches among these extremes, there is an enhancing possibility the rate pattern will compromise as well as turn around instructions.

Exists an adverse Momentum?

Description: Momentum Trading is a vector amount, given by the product of an item’s mass as well as speed. If the speed of the item is unfavorable, i.e. the item is taking a trip in what has been chosen as the unfavorable direction, the Momentum Trading will also be unfavorable.

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