Glossary
Momentum
The tendency of assets that have risen or fallen strongly to keep moving in the same direction for a time.
On this page
Momentum is the tendency of prices that have been rising to keep rising, and of falling prices to keep falling, for some period. In technical analysis the word also names a family of indicators that measure the speed of a price move. As an investment style, momentum means buying recent winners and avoiding or shorting recent losers, and it is one of the most studied patterns in finance.
Two ways to measure it
The simplest indicator compares today's close with the close a set number of periods ago.
Investors measure momentum over longer windows. Academic studies, beginning with Jegadeesh and Titman's 1993 paper, ranked stocks by their past 3- to 12-month returns and found that recent winners went on to beat recent losers over the following months. Many versions skip the most recent month, because very short-term returns tend to reverse.
What to watch for
Momentum works until it suddenly does not. Its sharpest failures are momentum crashes, which tend to come after a market bottom, when beaten-down losers rebound violently and recent winners lag; 2009 was a notable example. Strategies built on it trade often, which raises costs and, in taxable accounts, short-term gains. Momentum readings also say nothing about value: a stock can have strong momentum right up to the top of a bubble.