Is the concept of momentum and trend trading flawed?

Dr. Toad

Active member
169 33
Recently I have been trying to come up with some new systems. When I do this, I often need to quantify concepts. My general thinking of stocks and how price behaves has been for a while now that: A stock that is going up is more likely to continue going up than change directions. The simple reason behind this being that the stock is "trending" and "has momentum". At face value, at least to me, this makes sense. I recently decided to put it to the test though to see if anything can really be gained from trading this way.

I tested this by doing the following:
If a stock has had "x" up days (as defined by an intraday close - open gain) in a row, the stock would be bought the next day at open and sold at close.

I varied "x" from 1 to 10. Obviously in the lower range, I don't think anyone would conclude a stock has momentum or was trending. In the upper range however, this would be the conclusion that I would make. So, my expectation was that in the lower range of "x" values, I would have about a 50/50 win/loss rate, but I figured that if the concepts of momentum and trend truly offer any edge towards trading, I would see at least a marginally higher win percentage with higher "x" values.

I tested this over a 2 year lookback period (7/13/15 to 7/13/17) on 1,430 symbols (~20% of tradeable symbols I have access to). The results are as follows:

Momentum.png

The first column (up days in a row) represents "x". The margin of error based on a 99% probability was calculated as well and is in the last column. From this though it seems pretty clear to me that there is essentially no meaningful edge to be gained from trading with the "trend" or trading when "momentum" occurs. This result distribution would be in line with what would be expected from a pure unbiased coin toss sample.

Anyone have any thoughts?
 

Dowser

Experienced member
1,293 293
Recently I have been trying to come up with some new systems. When I do this, I often need to quantify concepts. My general thinking of stocks and how price behaves has been for a while now that: A stock that is going up is more likely to continue going up than change directions. The simple reason behind this being that the stock is "trending" and "has momentum". At face value, at least to me, this makes sense. I recently decided to put it to the test though to see if anything can really be gained from trading this way.

I tested this by doing the following:
If a stock has had "x" up days (as defined by an intraday close - open gain) in a row, the stock would be bought the next day at open and sold at close.

I varied "x" from 1 to 10. Obviously in the lower range, I don't think anyone would conclude a stock has momentum or was trending. In the upper range however, this would be the conclusion that I would make. So, my expectation was that in the lower range of "x" values, I would have about a 50/50 win/loss rate, but I figured that if the concepts of momentum and trend truly offer any edge towards trading, I would see at least a marginally higher win percentage with higher "x" values.

I tested this over a 2 year lookback period (7/13/15 to 7/13/17) on 1,430 symbols (~20% of tradeable symbols I have access to). The results are as follows:

View attachment 243058

The first column (up days in a row) represents "x". The margin of error based on a 99% probability was calculated as well and is in the last column. From this though it seems pretty clear to me that there is essentially no meaningful edge to be gained from trading with the "trend" or trading when "momentum" occurs. This result distribution would be in line with what would be expected from a pure unbiased coin toss sample.

Anyone have any thoughts?
There maybe more of an edge if you added the parameter of a breakout past previous highs (13, 26 or 52 wk)
 

malaguti

Senior member
2,373 459
Recently I have been trying to come up with some new systems. When I do this, I often need to quantify concepts. My general thinking of stocks and how price behaves has been for a while now that: A stock that is going up is more likely to continue going up than change directions. The simple reason behind this being that the stock is "trending" and "has momentum". At face value, at least to me, this makes sense. I recently decided to put it to the test though to see if anything can really be gained from trading this way.

I tested this by doing the following:
If a stock has had "x" up days (as defined by an intraday close - open gain) in a row, the stock would be bought the next day at open and sold at close.

I varied "x" from 1 to 10. Obviously in the lower range, I don't think anyone would conclude a stock has momentum or was trending. In the upper range however, this would be the conclusion that I would make. So, my expectation was that in the lower range of "x" values, I would have about a 50/50 win/loss rate, but I figured that if the concepts of momentum and trend truly offer any edge towards trading, I would see at least a marginally higher win percentage with higher "x" values.

I tested this over a 2 year lookback period (7/13/15 to 7/13/17) on 1,430 symbols (~20% of tradeable symbols I have access to). The results are as follows:

View attachment 243058

The first column (up days in a row) represents "x". The margin of error based on a 99% probability was calculated as well and is in the last column. From this though it seems pretty clear to me that there is essentially no meaningful edge to be gained from trading with the "trend" or trading when "momentum" occurs. This result distribution would be in line with what would be expected from a pure unbiased coin toss sample.

Anyone have any thoughts?
to add to cbrads comment, i have backtested systems of a break of 52week highs with 70% success rates across the entire FTSE going back 15 years. Trend trading does work, with a significant edge
 

Dowser

Experienced member
1,293 293
Also if you could define a stop loss level in terms of recent price action, eg. Previous closes, lows, medians, highs etc. then the successful trade's gain could be evaluated in R:R terms and a 50% win rate could still make you money
 

barjon

Legendary member
10,311 1,566
52% took us out of Europe so if it doesn't represent an edge we're in trouble :LOL:

Price doesn't often go straight up without any pullback which is perhaps indicated by the steep fall off in the number of trades as the number of consecutive ups increases. To test the trend it seems to me that you have to cater for temporary pullbacks in some fashion. Quite how I leave to you to wrestle with :)
 
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IceMan

Junior member
30 13
If I am understanding your post correctly, in part at least, you are dealing with the concept of probability. Prior to when you start counting your number of 'up days' you are not paying any attention to what has happened prior to day 1 in terms of determining whether the stock price is in any kind of trend.

Given that on any given day a stock price can go up, stay the same, or go down. With equal weighting of probability, the chance a stock will go up in price is 33%. So if you have calculated that by using your method you can achieve 50%+ wins, then that is pretty good?

As you are aware Im sure, Trend and Momentum do not necessarily occur together. Trend being the direction, Momentum being the speed, while importantly the other part of the equation, in my opinion, is Gravity, hence the likes of consolidation periods, and pullbacks. I think the idea you have is one where the price keeps going up the longer its been going up, whereas if you think of the stock price as a bouncing ball (its the best I can come up with at this time of night...) If you bounce the ball away from you hard onto the floor, it rises up, quickly at first, but then tapers off as gravity takes a hold, before hitting the ground and taking off again in an upward direction etc....The longer its up in the air the less likely it is for it to continue being up in the air without coming down.

A coin as we know has no memory, so statistically it can be flipped for years constantly and each outcome is totally independent of any prior or subsequent outcomes. Something that was touched on in one of the threads earlier this week however, is conditional probablility. I think this may well come into play here because for each additional day the price goes up, the likelyhood of it going up again the following day decreases, as I have just suggested above. This can Im sure be demonstrated statistically, but also consider that unlike the coin flip, sentiment, psychology and a whole load of other factors come in to play with stock prices.

Looking at your thoughts again in your 3rd paragraph. I can see where you are coming from, that each additional day the price goes up is going to confirm a trend. I think your edge, which is seemingly backed up by your spreadsheet is gained by buying a stock that has had the fewer number of updays. Your only consideration is how to screen and choose which ones to buy, which leaves me thinking about stocks for instance that are making new highs? i.e a stock that has gone up in price for one day only, but has also made a new high. Another round of testing maybe...?
 
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seekingTruth16

Active member
149 24
Wouldn't you consider trend as a longer term thing, i.e. not just the next day/bar. If the trend is up, I wouldn't necessarily think we'll be up on the next day, but maybe up 20 days from now.

Also it's worth thinking that something can be up 50% and down 50% of the time, and still be trending upwards. There is the extent of the move.

Is there overlap in your results? For the case that there were 10 days up and the next was up, does this count as 2 successes for the 9 days in a row system, 3 successes for the 8 days in a row etc.
 

Pat494

Legendary member
13,759 1,383
Wouldn't you consider trend as a longer term thing, i.e. not just the next day/bar. If the trend is up, I wouldn't necessarily think we'll be up on the next day, but maybe up 20 days from now.

Also it's worth thinking that something can be up 50% and down 50% of the time, and still be trending upwards. There is the extent of the move.

Is there overlap in your results? For the case that there were 10 days up and the next was up, does this count as 2 successes for the 9 days in a row system, 3 successes for the 8 days in a row etc.
There could be some importance to this very point but I will leave that to you to test.
For instance if the move is growing then the likelyhood is of continuing and conversely if the move is getting smaller then it is likely to reverse.
 

sminicooper

Experienced member
1,148 326
The problem with OP's analysis is that it doesn't take account of the true nature of trends. This has been alluded to by Barjon at #5 and IceMan's #6 bouncing ball analogy. Price trends are a summation of individual price cycles each having phase, amplitude and wavelength and when present take a sinusoidal form. If the ongoing sums of cycle amplitudes are increasing then it is highly likely that an uptrend is present (converse for a downtrend). However, the distance between peaks (wavelength) of the daily cycle which is what I think your analysis was attempting to measure, is unlikely to show the trend.

An eod price chart plot represents all the cycles present (and quite often they may be indistinct, non-existent or exhausted) which is why overall, trendlines are a pretty good guide to trend – easily eyeballed and very low-tech. The difficulty with price trends is that they occur in a sawtooth fashion. You also have to decide what you consider to be a trend e.g. we all know that a one-week uptrend may well be part of a six-month downtrend and this sort of thing can make life very difficult.

Apart from drawing physical trendlines, the only way I have found of determining trends is to measure and sum individual cycles. When a number of cycles are in phase their additive effect is greatest and the future trend can be predicted with reasonable confidence. The caveat is that cycles are not always present and when they are, amplitude wavelength and phase must all be considered carefully.

The best explanation I have found of the nature of trends and cycles within them is in Millard's book "Channels & Cycles" which expands on the work previously done by JM Hurst.
 
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seekingTruth16

Active member
149 24
I don't recognise what was under the back-test as trend trading.
Then suggest ways in which the OP could test that.

You have to define something before you can test it. For the opening poster - currently - trend is being defined by consecutive up bars. How should he/she define trend?

Well done to the opening poster for actually doing some testing.
 

tomorton

Legendary member
7,315 979
Then suggest ways in which the OP could test that.

You have to define something before you can test it. For the opening poster - currently - trend is being defined by consecutive up bars. How should he/she define trend?

Well done to the opening poster for actually doing some testing.

I've regularly posted aspects my trend-trading but so have lots of people - no doubt everyone doing it has their own personal approach with many slight differences, so my criteria are no better than any other trend trader's.

I have read a bunch of reports over the years saying that this or that TA method won't work, or even that all TA won't work. But they are usually based on entry, stop and exit criteria that real traders don't use, with no regard to underlying market strength as derived form indices etc., no pyramiding, no scaling in/out, etc. etc. and most crucially no facility to run winners. The classic academics' approach is where the study looks at buying on MA Golden Crosses and demands that the sell only occurs when a Death Cross occurs, and you will be able to find loads of MA studies pdf's that use this ludicrous set-up.

Back-testing is interesting, but only where it is also realistic.
 
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sminicooper

Experienced member
1,148 326
I've regularly posted aspects my trend-trading but so have lots of people - no doubt everyone doing it has their own personal approach with many slight differences, so my criteria are no better than any other trend trader's.

I have read a bunch of reports over the years saying that this or that TA method won't work, or even that all TA won't work. But they are usually based on entry, stop and exit criteria that real traders don't use, with no regard to underlying market strength as derived form indices etc., no pyramiding, no scaling in/out, etc. etc. and most crucially no facility to run winners. The classic academics' approach is where the study looks at buying on MA Golden Crosses and demands that the sell only occurs when a Death Cross occurs, and you will be able to find loads of MA studies pdf's that use this ludicrous set-up.

Back-testing is interesting, but only where it is also realistic.
Most approaches using MAs as a primary indicator are flawed because the longer the period of the MA, the longer the period of missing calculation. E.g. a 20 period MA cannot reliably calculate the last 10 points of the data period. This is why Mas should always be plotted in the "centred" fashion i.e. half a period span back, which means that the latest half period span must be estimated – and that's where the accuracy problem lies.
 

tomorton

Legendary member
7,315 979
Most approaches using MAs as a primary indicator are flawed because the longer the period of the MA, the longer the period of missing calculation. E.g. a 20 period MA cannot reliably calculate the last 10 points of the data period. This is why Mas should always be plotted in the "centred" fashion i.e. half a period span back, which means that the latest half period span must be estimated – and that's where the accuracy problem lies.

Well, you and I and most real traders know that an MA cross-over system is going to give random results, but so many academic papers condemn TA generally using just such a specific set-up.

Of course, these US business schools and university finance faculties which are the source of such a lot of this guff derive no income from private retail traders but such a lot from the investment industry. I guess in some circles, pleasing the client is a good justification for a bad piece of work.
 

NVP

Legendary member
36,739 1,872
welcome to trading ...........nothing works all of the time ......you just have to learn how to read the market and anticipate the moves in advance

N
 

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