Profitable Momentum Trading Strategies for Individual Investors

Foltice, B. & Langer, T. (2015) Profitable momentum trading strategies for individual investors. Financial Markets and Portfolio Management, 29(2), 85-113.

32 Pages Posted: 8 Apr 2014 Last revised: 30 Apr 2015

Bryan Foltice

Butler University

Thomas Langer

University of Muenster - Finance Center

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2015

Abstract

For nearly three decades, scientific studies have explored momentum investing strategies and observed stable excess returns in various financial markets. However, the trading strategies typically analyzed in such research are not accessible to individual investors due to short selling constraints, nor are they profitable due to high trading costs. Incorporating these constraints, we explore a simplified momentum trading strategy that only exploits excess returns from topside momentum for a small number of individual stocks. Building on US data from the New York Stock Exchange from July 1991 to December 2010, we analyze whether such a simplified momentum strategy outperforms the benchmark after factoring in realistic transaction costs and risks. We find that the strategy can indeed work for individual investors with initial investment amounts of at least $5,000. In further attempts to improve this practical trading strategy, we analyze an overlapping momentum trading strategy consisting of a more frequent trading of a smaller number of “winner” stocks. We find that increasing the trading frequency initially increases the risk-adjusted returns of these portfolios up to an optimal point, after which excessive transaction costs begin to dominate the scene. In a calibration study, we find that, depending on the initial investment amount of the portfolio, the optimal momentum trading frequency ranges from bi-yearly to monthly.

Keywords: Momentum Investing, Personal Finance, Portfolio Management

JEL Classification: G11, G12, G14

Suggested Citation

Foltice, Bryan and Langer, Thomas, Profitable Momentum Trading Strategies for Individual Investors (January 24, 2015). Foltice, B. & Langer, T. (2015) Profitable momentum trading strategies for individual investors. Financial Markets and Portfolio Management, 29(2), 85-113.. Available at SSRN: https://ssrn.com/abstract=2420743 or http://dx.doi.org/10.2139/ssrn.2420743

Bryan Foltice (Contact Author)

Butler University ( email )

Indianapolis, IN 46208
United States

Thomas Langer

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

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