In this article we’ll take a brief look at momentum strategy, which in its most basic form consists of capitalising on assets (be they shares, forex, indices or commodities) that have enjoyed strong moves either higher or lower.
It is often the case in markets that a big move in one direction can be extended over a longer period, and many momentum traders will look to take advantage of that; buying recent winners and selling recent losers.
With this in mind, I have looked back at the past two weeks of trading to identify which stocks have done well lately.
I looked at the FTSE 350, which is simply the combined FTSE 100 and 250 indices, and calculated the percentage gains between the closing price on 28 March and 4 April. The top five winners (excluding investment trusts) were as follows:
Trading is full of clichés but one applicable here is that, ‘nothing moves in a straight line’. However, as momentum trading implies, an asset often has sufficient strength to maintain a move. As an example, buying the top five winners from the week 21-28 March would have yielded a return of 5%. Not all weeks will yield positive returns, but historical evidence indicates there is a great deal of merit in this philosophy.
As we know, spread betting allows traders to go both long and short. Selling the biggest losers of the week is another form of momentum trading, but in this case the biggest five losers during the 21-28 March mostly rebounded in the week 28 March– 4 April, and a short trade in these would have lost around 4.8%. Market conditions, therefore, are very important, and at present we are seeing (despite weakness today in stock markets) a continuation of the upward move.
Momentum trading can be a useful tool for investors, and it is something that we will be looking at more at IG in a bid to provide more trading ideas.
Next week I will update the performance of the five companies mentioned above, for the duration between 4-11 April. I will also expand on historical examples and data, to investigate the strength of the arguments in favour of a momentum trading strategy.