DIY Momentum QnA and Discussion

The intent of the forum is to learn new things, it is also on us to unlearn preconceived misconceptions. Incorporating elements like stop-loss orders, stage analysis, and fundamentals (e.g., promoter holdings) into a momentum strategy can indeed provide additional layers of risk management and fine-tuning. However, it can also dilute the purity of a quantitative momentum strategy. Here’s a breakdown:

Stop-Loss Orders

• Pro: Protects capital by limiting losses during sudden price drops.
• Con: May lead to premature exits due to normal volatility, causing missed opportunities.

Stage Analysis

• Pro: Helps in identifying stocks in the early stages of an uptrend, enhancing the likelihood of catching strong momentum.
• Con: Adds a subjective element to the strategy, deviating from pure quantitative measures.

Fundamental Analysis (e.g., Promoter Holdings)

• Pro: Ensures that selected stocks have a solid backing and are less likely to be speculative, adding a layer of safety.
• Con: Shifts focus from purely price-based indicators to qualitative aspects, diluting the quantitative nature of the strategy.

Pure Quantitative Momentum Strategy

• Simplicity: Focuses purely on price movements and trends without additional subjective filters.
• Consistency: Follows a strict, rule-based approach, reducing the risk of emotional decision-making.

Balancing Both Approaches

While integrating these additional factors can potentially improve the robustness of a momentum strategy, it also moves it away from a purely quantitative approach. Each investor needs to find a balance that aligns with their risk tolerance, investment goals, and comfort level with subjectivity.

Conclusion

Adding stop-loss orders, stage analysis, and fundamental checks can enhance a momentum strategy by providing better risk management and selection refinement. However, it does dilute the pure quantitative nature of the strategy, making it more complex and potentially introducing biases. Each investor must decide based on their preferences and investment philosophy.