Info!! Why Fomo Fails: Trending Markets Are Non Necessarily Momentum Ones

As I talk alongside traders, I expose a mutual error that is responsible for quite a few losses:  the confusion betwixt vogue trading as well as momentum trading.  They are non the same thing.  Traders who fright missing out on a trending displace as well as chase forcefulness or weakness often larn whipsawed as well as stopped out.

Let's define our terms:

An property that is trending is making higher highs (lower lows) as well as higher lows (lower highs) during a given lookback period.  If y'all imagine a regression trouble for cost every bit a business office of time, the trouble would survive the trendline as well as at that spot would survive a noticeable positive or negative gradient over that lookback period.

An property that is trading alongside momentum tends to driblet dead on inwards the management inwards which it has been trading.  Strength tends to survive followed past times strength; weakness past times weakness.  Think of that regression trouble that is the best agree for a given trend.  If cost oscillates widely to a greater extent than or less that trouble (i.e., the agree is non great), this is because the trending property is non trading alongside momentum.  When cost is strong, it tends to fade as well as vice versa.  H5N1 trouble that is a really practiced agree suggests momentum inwards the management of the trend.

When traders assert that at that spot is a vogue as well as and thence purchase forcefulness (or sells weakness) to ride the trend, they are assuming that the vogue too displays momentum.  That ain't necessarily so.  Buying forcefulness inwards an uptrend as well as selling weakness inwards a downtrend is a peachy agency to underperform inwards a vogue marketplace that is non a momentum one.

Let's larn to the fantabulous Paststat site for a couplet of illustrations.  H5N1 technical indicator is a useful as well as familiar mensurate of cost forcefulness as well as weakness.  If an property shows momentum effects, it should demonstrate important forcefulness next high indicator readings as well as important weakness next depression readings.  Different indicators comprise unlike lookback periods, thence a expect at several is useful if nosotros desire to jurist momentum over differing fourth dimension periods.

To start, let's nation nosotros purchase SPY when it closes higher upward its upper Bollinger Band as well as agree for 5 trading days.  Over the past times 3 years, this has resulted inwards forty trades.  Of those, 24 direct maintain been winners as well as xvi losers for an average ambit of +.04% as well as a profits element of 1.13.  Meh.  No distinctive upside border to buying strength, merely too no important weakness.  This fits alongside my research:  when cost forcefulness occurs alongside positive breadth thrust as well as elevated momentum, at that spot is a greater probability of upside follow through than when the forcefulness occurs alongside petty oomph.  Averaged together, nosotros encounter no meaningful tendencies.

Now let's purchase SPY when it closes below its lower Bollinger Band as well as agree for 5 trading days.  Now nosotros direct maintain 43 trades:  28 winners as well as fifteen losers for an average ambit of +.98% as well as a profits element of 3.14.  That's a meaningful bullish tendency.  It suggests anti-momentum next weakness.  When cost has dropped significantly, we've tended to bounce.

The trader who bought forcefulness as well as sold weakness during the final 3 years lost coin on average.  It has been a trending market, merely non a momentum one.  Executing based on momentum has turned a usually winning vogue strategy into a losing one.  Think virtually traders who merchandise alongside a "fear of missing out", as well as y'all tin appreciate why that emotional designing is thence costly!

OK, thence let's purchase SPY when its RSI is higher upward lxx as well as agree for 5 days.  Now nosotros direct maintain 122 trades over a 3 twelvemonth period:  lx wins, 62 losses, for an average ambit of +.02% as well as a profits element of 1.08.  Meh.  If nosotros purchase SPY when its RSI has been below 30, nosotros direct maintain 24 trades:  eighteen up, vi downwardly for an average ambit of +1.79% as well as a profits element of 7.08%.

It's interesting that traders often emphasize trading alongside the vogue merely non chasing trades.  That's an implicit realization that a directional bias doesn't direct maintain to survive a momentum bias.  Many trends are traded best when they expect every bit though they're ending.

Further Reading:  Price Momentum as well as Cycles
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