The idea
Momentum is the tendency of assets that have risen over the past 3 to 12 months to keep outperforming for the next few months, and of losers to keep losing. It is one of the most studied patterns in finance and shows up across stocks, sectors, countries and asset classes.
How it is measured
- Absolute momentum: is the price above where it was a year ago, or above its The 200-day moving average?
- Relative momentum: rank a list by return over the last 12 months, often skipping the most recent month, and hold the top group.
Why it might work
Investors under-react to news at first and then over-react as a trend becomes obvious. Earnings upgrades also tend to come in streaks.
Risks
- Momentum crashes: after a sharp market fall, the rebound is often led by the previous losers, and momentum portfolios can drop 30% or more quickly.
- Turnover: frequent trading raises costs and taxes. See Portfolio turnover.
- It is the opposite bet to Mean reversion over short windows.
Relation to fundamentals
Rising estimates and rising prices often go together. A fundamental investor may use momentum only as a check that the market is starting to agree with their thesis.
See also
- Mean reversion What mean reversion is, how prices and valuations tend to return toward an average, how traders use it, and why it fails when fundamentals change.
- Relative Strength Index (RSI) What the RSI indicator measures, how the 14-day RSI is calculated, what overbought and oversold readings mean, and the limits of using it alone.
- Simple moving average (SMA) What a simple moving average is, how to calculate it, the common 50-day and 200-day averages, and how investors use them to read a trend.
- The 200-day moving average Why the 200-day moving average is the most-watched trend line in investing, what the research shows about markets above and below it, and its weaknesses.
Pages that link here: Managed futures, The 52-week range
Last updated September 30, 2026. Education only, not investment advice.