Relative Momentum Relative Strength
Relative Strength has been a well-documented anomaly for decades. Relative momentum applies a relative strength measure to a universe of stocks or markets (asset classes) to determine past winners and predicts those relative strength leaders will continue to outperform the laggards in the future.
Relative strength momentum was originally simply called “momentum” by academics and most investment managers simply called it “relative strength”. Momentum is the empirically observed tendency for rising prices to rise further. For example, a Jegadeesh and Titman (1993) study showed that stocks with strong performance over the past 3 to 12 months continue to outperform over the next 12 months. The high momentum stocks also outperform stocks with poor past performance in the next period.
What is the difference between relative momentum and absolute momentum?
Relative momentum is different than absolute momentum.
Relative momentum is based on price trends between different markets or securities in the cross-section. Relative momentum looks at the relative strength of a cross-section of markets. We rank them based on their relative strength momentum to determine which markets or stocks have gained more and which have gained less.
Absolute momentum is momentum across time, so academics started calling it time series momentum. Time series refers to a price trend, so time series momentum is the rate of change of a market or stocks on price trend.
To learn more about momentum and momentum investment strategies and trading systems, see:
Asymmetric Risks of Momentum Strategies
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