Definition
Momentum trading
Momentum trading buys what is already rising and sells what is already falling. The evidence behind it, the horizons it works on, and the reversal that ends it.
Momentum trading is a strategy family that treats a move already underway as more likely to continue than to reverse. It buys relative strength and exits relative weakness, taking its edge from the persistence of trends rather than from any view about value. The persistence is real but finite: momentum earns steadily through an extended move and gives a large share of it back at the turn, which is why exit discipline decides the outcome more than entry does.
- Also known as
- trend momentum · relative strength · riding the trend
How it is calculated
Momentum needs a lookback, a ranking, and an exit — the exit is the strategy:
· Lookback — the window over which strength is measured
· Ranking — relative to what: other assets, or the asset’s own history
· Exit — the reversal, time stop, or drawdown that ends the position
Return distribution: many small gains, ended by one fast large loss.
The exit rule, not the entry signal, is what makes the arithmetic work.
Worked example: A rule holding an uptrend for twenty sessions and exiting on a two-day reversal captures most of the move and forfeits the last leg by design.
It works until the crowd turns at once
Momentum is profitable while the flow that created a move keeps arriving. When it stops, everyone holding the same position reaches for the same exit, and the reversal is faster than the advance that preceded it. QANTERION runs momentum on crypto, US equities and crude oil, and caps each of them with a maximum drawdown limit for exactly this reason: the strategy has no opinion about when the turn comes, so the cap has to.
Horizon changes what the word means
Momentum over twelve months is a well-documented cross-sectional effect in equities. Momentum over minutes is a different thing entirely — an execution problem, driven by order flow and liquidity rather than by investor behaviour over quarters. A rule proven at one horizon says nothing about the other, and conflating the two is the most common way the research is misapplied.
How it gets misread
Momentum is routinely read as "buy what went up", which describes the entry and ignores the entire strategy. The edge lives in the exit rule and the position size, because the distribution is a long run of small gains ending in one fast, large loss. A momentum system without a predefined stop is not a momentum system, it is a bet that the trend is permanent.
Sources
- Value and Momentum Everywhere — The Journal of Finance (Asness, Moskowitz & Pedersen), hosted by AQR
- Time Series Momentum — Journal of Financial Economics (Moskowitz, Ooi & Pedersen), hosted by AQR
Definitions are educational. Nothing here is investment advice, and no metric described on this page predicts future results.
Definitions are the easy part
Knowing what drawdown means is not the same as having a system that halts on it. QANTERION applies these limits while a strategy runs.