Momentum
Momentum is the tendency of assets that have risen or fallen strongly in the recent past to continue moving in the same direction for some time.
In technical analysis, momentum refers to the speed of price changes, measured by indicators such as the rate of change, RSI and MACD. A stock gaining more each week shows strengthening momentum; a stock still rising but more slowly shows fading momentum.
In academic finance, momentum is one of the most studied return factors. Research by Narasimhan Jegadeesh and Sheridan Titman in 1993 found that US stocks with the best returns over the prior three to twelve months tended to continue outperforming over the following months. Many funds and ETFs now follow momentum strategies.
Explanations include investors underreacting to news and then herding into trends. Momentum strategies also carry risks: they can suffer sharp losses when trends abruptly reverse, sometimes called momentum crashes, and frequent trading increases costs.
Example: a simple momentum approach might rank stocks by their 12-month return, excluding the latest month, and hold the top tenth, updating the list regularly.