![]() Drawdown in contrast, refers to the decline in value in the next period from a previous local maximum. The Maximum Drawdown is defined as the accumulated loss of buying an asset in their highest point and selling at their lowest point during a period of time. One of the main concepts in analyzing the risk of a strategy is the Maximum Drawdown that the strategy has. On many occasions, investors or traders earn great profits in bull markets but they lose all or almost all their portfolio value when a bear market starts. Within this plan, the risk management of transactions and positions is the most important feature in the long term. Traders and investors should have in their mind an integral plan to execute trades or enter into a new position. It is important that any trading plan contains a risk management approach to minimize drawdowns, by the use of stop loss or stop limit orders, as well as avoid days of higher volatility. This field focuses on drawdowns, leverage and volatility. Risk and money management are the most important aspect in a trading strategy. Notes: Analysis in this article produced with Amibroker using data from Sharadar.Lastly we should have rules to manage the risk of the strategy. Revenue momentum and EBITDA margin show promise and are worth investigating further. However, the data from this article suggests that investors would do well to consider fundamental data points in their momentum investing strategies. Therefore, the most common type of quant strategies are price based. One reason for this dichotomy is that fundamental data is not as readily available as price data. Although price momentum is the most common type used by practitioners we found that other measures such as revenue momentum produced strong performance. In this article we analyzed four different measures of momentum to see which factors produce the greatest returns for investors. Therefore, all of our momentum factor, except price momentum, outperformed buy and hold. The backtest runs from January 2001 to January 2020.īacktesting the strategy between January 2001 to January 2021 on 8,000 US stocks we produced the following results and equity curve:įor comparison, a buy and hold return on SPY between January 2001 to January 2021 was 7.51% annual return with a maximum drawdown of -55%. This is the most common type of momentum investing strategy.įor this test we are buying the top 25 stocks with the strongest price momentum over the previous four quarters and hold for four more quarters. In this first test we are testing pure price momentum. Now we know the base strategy rules we can move on and start testing the individual factors. We start with $50,000 base capital, use commissions of $0.005 per share and an equal weighting position size of 4% per trade. ![]() Positions are then held for another year. Starting in 2001, each year we will buy the top 25 stocks from our database that have the highest score for each of the four factors mentioned above. We then isolate our four factors (price momentum, revenue, net income and EBITDA margin) and normalise them so that they can be scored from 0-100. ![]() We avoid nano caps, micro cap stocks and ADRs. We start with a database of 8,000 US stocks from Sharadar that includes fundamentals and delisted symbols. We will then be able to see which measures produce the best returns for investors. In this article, we will look at four separate measures of momentum price momentum, revenue momentum, net income momentum and EBITDA margin momentum. For example, this paper called Twin Momentum. Factors such as earnings, revenue and profit margins. More recently, authors have been including fundamental factors into their analysis. In the past, authors have mainly focused on price momentum with a lookback period of around 12 months. Momentum investing is a successful method practiced by many investors around the world. By Decoding Markets Investing Stocks Strategies/ Systems July 7, 2021
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