Charts & technicals
Momentum
The tendency of recent winners to keep outperforming, and losers to keep underperforming, over months.
How it works
Momentum is one of the most robust anomalies in finance, documented across countries, decades and asset classes. Typical definitions use returns over the past six to twelve months, skipping the most recent month.
Explanations divide between under-reaction to news and risk-based accounts. Neither is settled.
Where it misleads people
Momentum suffers rare, violent crashes at market turning points, when the previous losers rebound hardest. The strategy has very negative skew.
Related terms
- Factor investingBuilding portfolios around characteristics that have historically explained returns.
- Mean reversionThe tendency of extreme values — margins, multiples, returns — to drift back towards long-run averages.
- SkewnessWhether a return distribution leans towards large gains or large losses.
- Technical analysisStudying price and volume history to inform decisions, rather than studying the business.
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