Buy the strongest assets, sell the weakest β let relative strength guide you.
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Overview
Momentum trading is based on the empirical observation that assets which have performed well recently tend to continue outperforming in the near term, and vice versa. This "momentum effect" is one of the most consistently documented anomalies in financial markets, identified across equities, currencies, commodities, and crypto.
The strategy comes in two forms. Cross-sectional momentum ranks a universe of assets by recent return (e.g., 12-month return minus the most recent month) and buys the top decile while selling or avoiding the bottom decile. Time-series (absolute) momentum, popularised by AQR Capital, simply buys an asset if its recent return is positive and sells or holds cash if it is negative.
Key momentum indicators include: Rate of Change (ROC), which measures percentage price change over N periods; Relative Strength (not RSI, but comparing asset return to a benchmark); and moving average momentum (price above a long-period moving average = positive momentum). MACD and the Awesome Oscillator also serve as momentum indicators.
Momentum strategies are subject to "momentum crashes" β sharp, fast reversals that occur when market regimes change suddenly. Proper risk management uses volatility targeting to reduce position size when volatility spikes, and mean-reversion filters to avoid entering at extreme overextension.
Strategy Code
This is a TradingView Pine Script strategy example for this page concept. Paste it into the TradingView Pine Editor, add it to your chart, and run it in the Strategy Tester.
//@version=6
strategy("Momentum Trading Strategy", overlay=true)
fastLen = input.int(20, "Fast Length")
slowLen = input.int(50, "Slow Length")
fast = ta.ema(close, fastLen)This is a thinkorswim ThinkScript strategy example for this page concept. Open thinkorswim, create a custom strategy, paste the script, and apply it to your chart.
input length = 10;
def mom = Momentum(length = length);
def trend = ExpAverage(close, 50);
def buySignal = mom > 0 and close > trend;
def sellSignal = mom < 0 or close < trend;Join thousands of traders who use auto-Trading to execute this strategy automatically, 24/7.
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