Momentum Trading Strategy: Investing in Stocks with Volume and Price Criteria

Introduction

This Momentum Trading Strategy is a stock investment approach that focuses on identifying stocks with strong trading volume and favorable price conditions. (Original portfolio of Imetzg). The investment idea aims to capitalize on short-term price movements by entering positions when specific criteria are met. The filters incorporate trading volume, simple moving averages (SMA), and price ranges to guide investment decisions.

Below you will see the screenshot from the portfolio's filters.

Trading Volume Criterion

The strategy begins by evaluating the trading volume of a stock. The trading volume must be greater than the Simple Moving Average (SMA) of the Trading Volume Total (TTL). Additionally, the SMA of the Trading Volume TTL must exceed 1,000,000 shares traded. This criterion ensures that the stock exhibits a significant level of market activity and interest.

Price Criterion

The next criterion focuses on the closing price of the stock. To be considered for investment, the closing price must be lower than the SMA of the Closing Price over the past 7 days. This condition suggests a potential downward trend or consolidation in the stock's price, making it an opportune time to enter a position.

Price Range Criterion

Furthermore, the strategy stipulates that the closing price must fall within a specific price range. The stock's closing price should be greater than $2 and smaller than $10. This range ensures that the strategy targets stocks that are accessible to a wide range of investors and have the potential for significant price movements.

Sell Decision

If the stock does not meet all the criteria mentioned above, it is considered unfavorable for investment, and the strategy recommends selling the position. This rule helps to manage risk and avoid potential losses in stocks that do not align with the desired trading conditions.

Backtesting

Since the author "Imetzg" did not publish any backtests, we copied the strategy, named it "Momentum Trading Strategy (copied from LARRY'S...)" and performed two backtest on it.

We wanted to see if this strategy will deliver good results also over long periods, including period of the financial crisis, the corona drawdown and the bearish year 2022.

This first backtest was done with a monthly rebalancing intervall.

In order to verify if shorter rebalancing intervall would provide a higher return of investment, we tested the same period but shuffling the portfolio on a weekly base.

The result is amazing: The backtest calculates a 30% ROI CAGR since October 2007, when rebalancing the portfolio weekly. This is 23% more CAGR than the SP500 ETF for the same period.

Conclusion

The Momentum Trading Strategy is designed to identify stocks with strong trading volume, favorable price trends, and specific price ranges. By following the strategy's criteria, investors can potentially benefit from short-term price movements and make informed decisions on when to buy or sell stocks.

The performed backtest on this quantitative portfolio revealed a high ROI potential between 18 - 30% CAGR.

It is important to note that investors should conduct thorough research and consider other fundamental and technical factors before implementing any investment strategy.

The strategy was created using the Stock Screener tool from SimFin and was subjected to backtesting. Details on the quantitative criteria and the backtesting results can be viewed in detail here: https://app.simfin.com/portfolio/645919958dccaa41c1f38c6b

Disclaimer: The information in this article is for educational purposes only and should not be construed as financial advice. The author is not acting as a financial advisor, and readers are solely responsible for their investment decisions. The author and publisher disclaim any liability for losses or damages resulting from the use of this information. Investing carries risks, and past performance is not indicative of future results. It is essential to conduct thorough research and consult with a qualified financial professional before making any investment decisions. Readers should independently verify information and consider their own financial situation and risk tolerance.