Buy assets showing upward price momentum, sell those trending down. Uses moving average crossovers and relative strength. The most researched factor in quantitative finance.
History
Momentum was first rigorously documented by Jegadeesh and Titman in 1993, showing that stocks with high returns over the past 3-12 months continue to outperform over the next 3-12 months. The effect has been found in virtually every asset class and market studied. AQR Capital Management, founded by Cliff Asness, has been the most prominent academic-practitioner advocate, publishing extensively on momentum and running large-scale momentum strategies. Trend following (the macro/futures cousin of momentum) has been practiced by CTAs like Man AHL, Winton Group, and Aspect Capital since the 1980s. The Dunn Capital track record stretches back to 1974.
How It Works
Rank a universe of stocks by their past 12-month return, excluding the most recent month (the '12-1' signal)
Go long the top decile (winners) and short the bottom decile (losers) to form a long/short momentum portfolio
Alternatively, use moving average crossovers: buy when the 50-day SMA crosses above the 200-day SMA (golden cross)
In futures/macro trend following: trade breakouts, use exponential moving average crossovers across multiple timeframes
Rebalance monthly. Weight positions by inverse volatility to equalize risk contribution
The 1-month exclusion (skip-month) avoids the short-term reversal effect documented by Jegadeesh (1990)
Example Trades
NVDA ranks in top decile of 12-1 month momentum in S&P 500 universe
entry Long NVDA as part of momentum basket, weighted by inverse vol
exit Held for 1 month until rebalance; NVDA remains in top decile
result Contributed +4.2% to the momentum leg
Gold futures break above 200-day moving average with rising ADX
entry Long gold futures at $2,050 per trend-following system
exit Exit when price crosses below 50-day MA at $2,180
result +6.3% on the position
Related Charts
Who Runs This
When It Works vs. Fails
works
Strong directional trends, either up or down. Crisis periods (momentum shorts tend to crash, providing short-side gains). Extended bull or bear markets.
fails
Sharp V-shaped reversals (like March 2009) where last year's losers suddenly become winners. High-chop, no-trend environments.
Risks
01 Momentum crashes: sharp, sudden reversals can wipe out years of gains in weeks (e.g., March 2009 momentum crash)
02 The strategy has high turnover and transaction costs, especially in less liquid markets
03 Momentum is negatively skewed: many small wins punctuated by infrequent but severe drawdowns
04 Crowding risk has increased as momentum became one of the most popular quant factors
05 Struggles in 'choppy' or range-bound markets with frequent reversals
Research
Jegadeesh, Titman, 1993
Asness, Moskowitz, Pedersen, 2013
Moskowitz, Ooi, Pedersen, 2012
Mamais, Thomakos, Vlamis, 2025