Definition
The term momentum strategy refers to an investment approach that involves purchasing securities experiencing an upward price trend and selling those that are declining. A momentum strategy relies more on investor sentiment than company fundamentals.
Explanation
Also known as momentum investing, a momentum strategy is an approach to investing that leverages the recent trend of a security when making purchase or sell decisions. Momentum traders purchase securities experiencing a recent increase in value and sell securities experiencing a recent decline in value.
Momentum traders believe recent trends will continue into the future. This philosophy contrasts with those that believe in the random walk theory, which states past movement cannot be used to predict future movement. This strategy is also at odds with the efficient market hypothesis, which states it is not possible to beat the market because the value of a security reflects all known information.
Seasonality is thought to explain the success investors experience when using this strategy. For example, investors may sell stocks performing poorly throughout the year, driving the price of the security even lower. As the price of the security continues to drop, even more investors decide it is time to sell, thereby continuing the trend.
Related Terms
- The term tactical asset allocation refers to an investment approach that actively adjusts the allocation of assets in a portfolio. Tactical asset allocation involves the continual rebalancing of the mix of investments in a portfolio to take advantage of pricing anomalies.
Moneyzine EditorSeptember 21st, 2023 - The term strategic asset allocation refers to an investment approach that rebalances the allocation of assets in a portfolio to achieve a long-term target. Strategic asset allocation typically involves moving the funds from over-performing asset classes to those that are underperforming.Moneyzine EditorSeptember 21st, 2023
- The term vanilla strategy refers to an approach to investment decisions that is plain and simple. Vanilla strategies might also be described as conservative, since they are a back to basics approach to investing.Moneyzine EditorSeptember 21st, 2023
The term balanced strategy refers to a portfolio allocation approach that attempts to strike a balance between risk and return. Balanced investment portfolios typically contain a mix of equities as well as fixed income securities.Moneyzine EditorJanuary 8th, 2024
The term Halloween strategy refers to the selling of stock before May and not investing in equities again until the end of October. The Halloween strategy is based on a theory that the months of November through April provide investors with stronger capital gains than the remainder of the year.Moneyzine EditorJanuary 19th, 2024
