Why Does Momentum Exist? | Momentum Trading Strategies | Quantra Courses

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This video is the preview of our course on Momentum Trading Strategies.
https://quantra.quantinsti.com/course/momentum-trading-strategies

Timestamp:
00:11 – Slow diffusion of news
00:22 – Occurrence of momentum
00:42 – PEAD Strategy
01:53 – Futures Market

Welcome to this video lesson in the second part of why momentum exists?

After completing this, you will be able to explain the following reasons for the existence of momentum.
Information flow, analysis, and reaction are not symmetric.
Everyone analyses the news and takes action at a different pace. And this results in momentum.

When can momentum due to this occur?
his momentum can be seen in scheduled events or during news releases. For example, FED meetings, auction dates, release of economic data such as unemployment data, and corporate earnings announcements.

What kind of strategies can be used to profit from it?
There is a very well-known strategy used by many hedge funds on corporate earnings announcements and is known as post–earnings-announcement drift (PEAD).

In this strategy, as you would have inferred, post the earnings announcement the stock continues to drift towards the earnings surprise.
Let’s take a look at Disney’s example: Disney is a well-known entertainment conglomerate. In addition to their movies and theme parks, it has acquired quite a few companies on its own.

On November 7, Disney’s price was $132 when it released its fourth-quarter earnings report beating estimates of both revenue and profits.
Thus, as a potential trader how can you benefit from it? You can buy Disney after the earnings are announced as the revenue and profits are above the estimated numbers.

Well, as expected, the stock price climbed to $148 on November 13. After a while, the stock price declined. Despite the decline, the share price climbed to $151 on November 26. Hence if you had gone long on Disney, you could have made a decent gain in the month of November.

Let’s move to the next reason now.
Momentum trading is very prevalent in the futures market and many commodities traders are trend followers.

Do you know the reason for that? This is due to the persistence of roll returns. In the futures market, the roll return is the difference between futures returns and spot returns. And for a long period of time, the sign of roll returns don’t change.
So if roll returns are positive then you simply long it and profit from it. And similarly, if the roll returns are negative you can short it.
This strategy is covered in detail along with implementation in the later part of this course.

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Is Momentum Trading Strategy, Why Does Momentum Exist? | Momentum Trading Strategies | Quantra Courses.

Just how do short-term traders generate income?

One way to make money on supplies for which the price is dropping is called brief selling (or going short). Brief marketing is a fairly easy principle: an investor obtains a supply, sells the stock, and after that buys the supply back to return it to the loan provider. Brief sellers are betting that the stock they market will decrease in price.

What Is Momentum Investing?

Momentum investing entails a technique to profit from the continuance of an existing market trend. It involves going long stocks, futures or market ETFs showing upward-trending rates and also short the respective possessions with downward-trending rates.

Momentum investing holds that patterns can continue for some time, as well as it’s feasible to profit by sticking with a trend till its verdict, regardless of the length of time that may be. As an example, Momentum capitalists that went into the UNITED STATE stock exchange in 2009 normally took pleasure in an uptrend till December 2018.

Can anyone short a supply?

The main danger of shorting a supply is that it will in fact boost in worth, leading to a loss. The prospective price appreciation of a stock is theoretically unrestricted as well as, therefore, there is no restriction to the prospective loss of a brief setting. Nude brief marketing is the shorting of supplies that you do not have.

Sumed Up

Momentum is a key principle that has actually shown important for identifying the chance of a lucrative trade. Dimensions of Momentum can be used in the brief as well as long term, making them valuable in all kinds of trading methods. Numerous technological trading devices are available to reveal the strength of fads and whether a trade on a particular asset may be an excellent wager.

Nonetheless, traders ought to be advised that Momentum estimates are usually computed using dimensions of past price patterns. Actual Momentum and rate can change anytime based on events that weren’t factored into the initial calculations. Because of this, it is very important to take preventative procedures, such as establishing stop-losses, to safeguard versus unanticipated price reversals in even the most possible Momentum circumstances.

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