Measuring Momentum for Momentum Models: Simple Trading Strategies Part 3

In this series, we cover some basic trading strategies that can help you get started with developing your own automated trading systems.

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In our previous post, we talked about the concept of Momentum: extrapolating from existing trends. Momentum strategies assume that stocks which are going up will continue to go up and stocks which are going down will continue going down, and buy and sell accordingly.

The obvious question is, how do we determine or measure this momentum? In this post, we will talk about different ways to measure momentum.

You will notice that some of the signals used for momentum trading could well be used as inverse signals in a mean reversion system as well. This should be expected, momentum and mean reversion are opposite strategies. This is also why it is very important to check for which kind of behavior might be present in your data before you actually try developing a strategy based on that.