In the classic momentum strategy, why is the most recent month excluded from the 12-month return calculation?

The last 1-month return often shows short-term mean reversion (stocks that just rose tend to dip slightly). Excluding it improves the momentum signal's predictive power for the next 3-12 months.

What is the classic cross-sectional momentum strategy?

Rank stocks by 12-month return (skip last month). Buy top 20% performers. Sell (or short) bottom 20%. Rebalance monthly. The top-minus-bottom portfolio has historically earned 8-12% annualized.

What is a "momentum crash"?

A sudden, sharp reversal of momentum positions. Occurs when beaten-down stocks rebound violently (e.g., market bottoms in 2009 or 2020). Short legs of momentum strategies can lose 30-50% in weeks.

What is trend-following (time-series momentum)?

Buy an asset when it's above its long-term moving average (e.g., 200-day MA), sell/exit when it falls below. Works across stocks, bonds, commodities, and currencies.

TradeSmart

IntermediateQuantitative Investing

Momentum Strategy: Ride the Trend, Exit Before It Breaks

Momentum investing is one of the most robust and extensively documented anomalies in finance. It systematically buys recent winners and sells recent losers — and it works across stocks, bonds, currencies, and commodities.

By Jim Liu · Published February 2026

TL;DR

The Core Principle

Stocks that have outperformed over the past 3-12 months tend to continue outperforming over the next 3-12 months. This persistence is called momentum. The classic implementation: rank all stocks by 12-month return (excluding last month), buy the top 20%, sell the bottom 20%.

Key Terms:

price momentumcross-sectional momentumlookback period

→Factor Investing →US Index Investing

Momentum Strategy: Ride the Trend, Exit Before It Breaks

The Core Principle

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