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The Stock Momentum Trade Momentum traders try to profit from a short term future outlook on a stock. Traders will often utilize options contracts to play a stock's momentum. Options allow you to ...
While momentum investing is well-established as a phenomenon no consensus exists about the explanation for this strategy, and economists have trouble reconciling momentum with the efficient market hypothesis and random walk hypothesis. Two main hypotheses have been submitted to explain the momentum effect in terms of an efficient market.
Momentum Trading: Momentum traders simply buy stocks that are already moving up or sell stocks that are on the way down. The general principle is that a stock in motion tends to stay in motion ...
Where can you find stocks for this strategy: This strategy can work well for stocks that rise more in line with the market as a whole, though it can also work with high-flying stocks, too.
The relationship between different moving average trading rules is explained in the paper "Anatomy of Market Timing with Moving Averages". [4] Specifically, in this paper the author demonstrates that every trading rule can be presented as a weighted average of the momentum rules computed using different averaging periods.
When these trades unwind, it can cause sharp price declines, exacerbating the momentum crash. [3] Liquidity issues are another factor that can contribute to momentum crashes. During market stress, liquidity can dry up, leading to larger price swings for momentum stocks.
We recently reported that the momentum factor has historically outperformed in the period between the cycle's broadest moment, when the most stocks are participating, and the market's final peak.
In finance, momentum is the empirically observed tendency for rising asset prices or securities return to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month.
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