Systematic Momentum Trading: Absolute and Relative Strength

Momentum is one of the most persistent anomalies in finance. Assets that have performed well recently tend to continue outperforming in the short to medium term. Systematic momentum turns this observation into a repeatable, testable strategy.

Absolute vs. Relative Momentum

Absolute momentum asks whether an asset's own past return is positive. If it is, you buy; if not, you hold cash or bonds. Relative momentum ranks a set of assets and buys the strongest performers. Combining both, often called dual momentum, can improve timing and selection.

Lookback Periods

The lookback period defines how far back you measure performance. Common choices are three, six, and twelve months. Shorter lookbacks react quickly but generate more noise and turnover. Longer lookbacks are smoother but slower to exit deteriorating trends.

Risk Filters

Momentum can suffer large drawdowns during market crashes. Add a risk filter, such as a 200-day moving average or volatility targeting, to reduce exposure when the market environment turns hostile. The filter often lowers returns slightly but cuts maximum drawdown dramatically.

Backtest Momentum with NeuroBacktest

With NeuroBacktest, you can test momentum strategies in seconds. Try: "Backtest a 6-month relative momentum strategy on SPY, QQQ, and IWM from 2015 to 2024 with a 200-day moving average risk filter." The engine shows rankings, equity curves, and trade logs.