Despite the truisms about not trying to chase the market or time trades based on external events, a momentum-based strategy can provide a way for savvy investors to use short term trends to their advantage. Simply put, a momentum strategy calls for buying stocks that have just started on an upward trajectory and selling off underperformers. This determination can be made in relative terms as compared to other securities, or by comparing the stock to its own past performance. Momentum is one of the oldest and most reliable investment strategies, and there is a long pedigree of investors and academics who embraced the idea of cutting short losses and extending profits though use of momentum.
- The main role of investors who participate in momentum investing is to look into outperforming securities.
- Those who engage in what is called relative momentum spend time comparing securities with one another.
- Momentum investing can be seen in various historical materials such as a 1933 article by Herbert Jones and Alfred Cowles III.
“Momentum, and particularly time-series momentum, has been in our DNA since day one.”
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