Momentum trading – guidance for practical implementation. Strategy backtest and trading metrics.

Last update February 26, 2020

Trading idea – every month on the last trading date, the close price for each tradable instrument is under testing observation to define the % of deviation from the price at the start of Timing period (3 months for given trading strategy). The instrument that was able to demonstrate the best result will be targeted as suitable for long position at least for the next 1 rolling month. Selection sample is QQQ (Nasdaq 100 ETF), SPY (SPX500 ETF), EEM (MSCI Emerging Markets ETF) and TLT (Treasures bonds 20 years ETF)

Here is a link to core settings of momentum startegy

Trading strategy highlights

For February the momentum strategy leader is QQQ (Nasdaq 100 ETF) and the same instrument was i leader in January. Since 2004 strategy CAGR is 18.08% vs SPX 8.97% and positive Alpha has been generated +9.11%.

Background of the strategy All calculation has been done with the application of tools granted by https://www.portfoliovisualizer.com  . Using link you can go derictly to strategy settings to verify model.
Vessel Capital use the modified version of momentum strategy and it is available at Etoro platform as Spxhedgefund

In prior posts we analyzed and backtested value investing, gap trading, contango collection strategy or more accurately to say the collection of futures premium in commodities and volatility. Now time to look at another trading model that widely known as momentum trading.

First of all, I would like to remind that two major things have to be implemented in trading

(1). The setting of the workable idea that from hypothesis transforming into the trading model that useable based on the set of rules. The application the set of rules is a trading method, and therefore the second precedent condition of succesfull trading is discipline.

(2). Discipline or strict following the set of rules to trade and trade according to adopted and verified algorithm – a road map that will lead capital to long term growth. Any attempt to change algorithm means that its originator coming into unknowing territory that creates the risk of emotional trading. The emotion and investment are two categories that absolutely can’t be on the common ground of trading.

The momentum trading based on the conception that there is some finite universe of instruments that have a different correlation to each other. Usually, it is a combination of ETFs and Treasures. Ideally, some of these instruments have to be in negative correlation to the main family of instruments. To show how it works I will use 3 most liquid ETF – SPY, QQQ and EEM. All these 3 instruments are based with a high level of liquidity and reflect different stocks market segments SPY- broad index, QQQ – technology, EEM – emerging markets. As the main low correlated instrument, I will implement TLT.

The strategy algorithm description

Timing period that defined as period of time for monitoring to select instrument that showed best trading result, either positive or negative. For suggested trading strategy the timing period is 3 months.

Trading frequency – the time period of revising the leader and in the case of given strategy defined as 1 month.

The Rotation and Selection rules are following:

Momentum model – Relative Strength

Tradable instruments – TLT, QQQ, SPY, EEM

Starting balance – 10 000 USD

Timing period – 3 m

Trading Frequency – 1m.

Time setting specification – end of the day.

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3 Comments

  1. Very good strategy may I ask what studies did you use to make this strategy? I am interested in the financial markets and I would like to learn more about this.

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    1. Hi. You can look at portfoliovizualizer.com to know detailes about publicly available resources. But I use more robust trading models that based on more sophisticated quantitative models and trading ideas. There is no special book. Trading models based on my practice and work for investment banks. I will launch later more complex website with details about tradings process.

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