Milan Momirov

A Simple Momentum System for Beating the Market

Like many other discussions of momentum analysis, this article makes broad assertions of the virtues while skirting the difficult details. Of course momentum exists in individual stocks – few people subscribe to the pure form of the random walk.

The underlying economic principles are readily understandable. For a single company, steady earnings growth over the past few quarters is in most instances the result of circumstances that won’t change on a dime, so, all other factors being equal, betting on a continuation of a good trend is better than betting on the reversal of a series of bad quarters. An ETF approach is simply the single company approach applied to a sector.

The difficult details are the choice of entry and exit points. Most trends are interrupted by breaks, and all eventually reverse. All momentum-investing systems rely upon rules that purport to filter out the noise, cut the losses, hang in through the head-fake breaks, and exit before the true reversal, rolling the investment into another stock’s uptrend.

Most such systems will make some money some of the time. If any system exists that makes good money all of the time, its inventor isn’t going to be writing a book about it.