Momentum Trading Strategy: What the Research Says, and Why It Crashes
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The 2 kinds of momentum, the evidence behind them, the weeks when they fail, and a simple 3-step check
Published: 17 October 2026 · Last updated: 17 October 2026 · By Spencer Li, CFTe
A momentum trading strategy buys whatever has risen the most over the past few months and avoids, or sells short, whatever has fallen the most. The bet is that strong prices tend to stay strong for a while, and weak prices tend to stay weak.
It sounds too simple to work, but it is one of the best-tested ideas in finance. Researchers have found it in stocks, bonds, currencies and commodities, across many decades and many countries.
There is a catch, though. Momentum has rare, violent losing streaks, and they tend to arrive just as a beaten-down market starts to recover. The edge also shrinks once trading costs come out. Below are the 2 kinds of momentum, what the research says, and a simple 3-step check.
What are the 2 types of momentum?
The word “momentum” covers 2 different questions, and most confusion comes from mixing them up.
Relative momentum asks: which of these assets has risen more than the others? Academics call it cross-sectional momentum. You rank a group of stocks or funds by their past return and buy the leaders.
Absolute momentum asks: has this asset risen at all? Academics call it time-series momentum. You look at one asset on its own and only hold it while its recent return is positive.
| Relative momentum | Absolute momentum | |
| The question | Is it beating its peers? | Is it rising at all? |
| Also called | Cross-sectional momentum, relative strength | Time-series momentum, trend following |
| Typical lookback | 3 to 12 months | About 12 months |
| What it needs | A group of assets to rank | Just 1 asset |
| What it does in a bear market | Still buys the “best” of a falling group | Moves you to cash or bonds |
| Main risk | Crashes at sharp rebounds | Whipsaws in sideways markets |
The second kind is close to what our post on trend following describes. And neither kind is the same as a momentum indicator, which measures how fast price is moving on a chart over a few days. A trader can use that indicator without running a momentum strategy at all.
Does momentum trading actually work?
On the long-run evidence, yes, it has.
The modern research starts with a 1993 paper by Narasimhan Jegadeesh and Sheridan Titman, who found that stocks with the best returns over the past 3 to 12 months kept beating the worst ones over the next few months. Critics said they had simply found a pattern by chance. So in 2001 the same authors checked the years after their paper, and reported that “momentum profits have continued in the 1990’s suggesting that the original results were not a product of data snooping bias.”
The absolute kind has similar backing. A 2012 study by Tobias Moskowitz, Yao Hua Ooi and Lasse Pedersen looked at 58 futures and currency markets over more than 25 years. They found that “the past 12-month excess return of each instrument is a positive predictor of its future return.” The effect “persists for about a year and then partially reverses over longer horizons.”
That last phrase is worth noticing. Momentum is a medium-term effect. Over the following 4 to 5 years, the 2001 paper found the winners tended to give some of it back.
One practical point surprises most new traders. Most momentum research ranks assets by their total return over a past period, often the last 12 months, leaving out the most recent month. It does not use the RSI or a moving average crossover.
A trader on a swing trading forum learned this the hard way. He screened for stocks above their 20 and 50-day averages with an RSI near 45 to 50, and could not find a single stock in a clear uptrend. That screen is looking for a pullback inside a trend, which is a different job.
If you want a simple daily routine for reading trends before you trade them, our free 15-Minute Swing Trader’s Checklist covers it. Get the free checklist →
How do momentum traders pick what to buy?
There are 2 well-known published approaches, and they come from opposite ends of the market.
Gary Antonacci’s Dual Momentum Investing (2015) uses both kinds together. Relative momentum picks the strongest asset, and absolute momentum decides whether to be invested at all. His argument is that relative momentum alone “raises returns without reducing risk,” because it still buys the best of a falling group. Adding the absolute check is meant to move the money to bonds when even the leader is losing to Treasury bills.
William O’Neil, who built a long career on stock leaders, used momentum differently. He rejected simply buying the stocks with the highest relative strength. He wanted stocks that were beating the market as they broke out of a sound base near a new high. In his own comparison, stocks bought that way worked 6 or 7 times in 10, against 3 or 4 times in 10 for stocks bought while sliding below their 10-week average. Our post with William O’Neil’s trading tips covers more of his thinking.
Why do momentum strategies crash?
This is the part most momentum sales pages leave out.
Kent Daniel and Tobias Moskowitz studied the worst stretches in a 2014 paper called “Momentum Crashes.” They found that momentum suffers “infrequent and persistent strings of negative returns.” The crashes, in their words, “occur in ‘panic’ states – following market declines and when market volatility is high – and are contemporaneous with market rebounds.”
Their numbers from 2009 show it plainly. From March to May 2009, the US market rose 26%. The past winners rose only 8%, while the past losers rose 163%. In July and August 1932, the market rose 82%, the winners 32% and the losers 232%.
The reason is simple. After a long fall, the “winners” are the stocks that fell least, often the dull, defensive ones. The “losers” are the most beaten-down, riskiest names. When fear lifts, the riskiest names bounce hardest. A momentum book that is short the losers gets hurt badly. A long-only book of leaders is not wiped out, but it badly lags.
Momentum also has a lumpy feel, even in good years. A trader posted on a swing trading forum after his momentum screener gave him 3 signals in 1 week. One collapsed, one ran hard, and one did nothing. His verdict was: “I think I got all 3 expected outcomes.” That is a fair summary of how this style feels from trade to trade.
Does the momentum edge still exist after costs?
The honest answer is smaller than the textbook numbers suggest.
Research by David McLean and Jeffrey Pontiff, published in 2016, found that across many published market patterns, about half of the original return disappears once the paper is out and traders start acting on it. Momentum also trades often, because the leaders keep changing. Every commission and every bit of slippage comes out of the edge.
To be fair to the other side, the 2001 Jegadeesh and Titman check is a real point in momentum’s favour. The profits continued after the 1993 paper, which is more than many published patterns can say. What has shrunk is the size of the edge, and the margin for error that comes with it.
How to use momentum: a 3-step check
Here is a simple way to use momentum without being run over by it. It works for picking a stock, a sector or a whole market.
- Rank the choices. Rank them by their return over the past 6 to 12 months, leaving out the most recent month. Look at the top of the list only.
- Check the leader against cash. Make sure the leader is also rising on its own, with a return above what cash pays. If even the leader is losing to cash, stand aside.
- Set the exit. Decide it before you buy. A fixed stop or a trailing stop loss keeps a single crash from taking a large share of the account.
Here is a hypothetical example with 5 made-up funds and a cash rate of 4% a year:
| Hypothetical fund | Return over the past 12 months, excluding last month | Beats peers? | Beats cash? |
| Fund A | 18% | Yes, top | Yes |
| Fund B | 12% | No | Yes |
| Fund C | 6% | No | Yes |
| Fund D | 2% | No | No |
| Fund E | -9% | No | No |
Fund A passes the first 2 steps. Now imagine every fund is negative, with Fund A at -3%. It is still the “best,” but it fails the cash check, and the check says to hold cash instead.
The Daniel and Moskowitz paper adds one more idea for the last step. A version of momentum that shrank its bets when its own risk was high “approximately doubles the alpha and Sharpe Ratio” of the plain version, in their tests. In plain terms, smaller positions in wild markets did much better than a fixed size.
Momentum works best as the reason to look at a stock, with the chart as the reason to buy it. The ranking narrows the list. The entry, the stop and the size still decide the result. For the entry side, see our post on the 4 types of trading setups.
So, when your strongest stocks lag on the first big up day after a fall, will you know whether that is a crash in the making or a normal wobble? And how much of your account would you let ride on a single leader? For more ways to build a system around rules like these, see the guide to trading strategies.
FAQ
What is momentum trading in simple terms?
It is buying assets that have risen the most over the past few months, on the evidence that strong prices tend to stay strong for a while, and exiting when that strength fades.
Is momentum trading profitable?
The research says momentum has paid over long periods across many markets. It also shows rare, sharp crashes, and about half of a published edge tends to fade once traders learn of it. Results depend heavily on costs, sizing and exits.
What is the difference between momentum and trend following?
Trend following is usually absolute momentum: holding an asset while it rises on its own. Momentum trading often means relative momentum, which ranks assets against each other and buys the leaders.
What timeframe does momentum trading use?
Most research looks at returns over the past 3 to 12 months and finds the effect lasts up to about a year. Short-term swing traders apply the same idea over weeks.
Is a momentum indicator the same as a momentum strategy?
No. A momentum indicator measures how fast price is moving over a few bars on a chart. A momentum strategy ranks assets by their return over months and holds the leaders.
Go deeper
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About the author. Spencer Li is the founder of Synapse Trading and a Certified Financial Technician (CFTe) with over 15 years of trading across stocks, forex, crypto, commodities, and bonds. His trade log is public: every trade since April 2024, dated, losses left in. He teaches low-risk swing trading in 15 minutes a day, one system for any market.
Educational content only, not personalised financial advice. Trading carries risk, including loss of capital. Past performance is not indicative of future results. Synapse Trading is not licensed or regulated by MAS.
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Educational content only, not personalised financial advice. Trading carries risk, including loss of capital. Past performance is not indicative of future results. Synapse Trading is not licensed or regulated by MAS.
