Thanks Sharmaudi ! Your to the point analysis is superb.
Agreement
15% SL is too tight. Even minor pull back & whipsaw is giving sell alerts. Your risk per trade logic is acceptable. Also for winners to run further & longer a higher % SL is the way to go.
Relative Index overlay is a MUST. It’s like a radar, compass. May be Nifty Mid-cap Index is suitable in this case. However, what I am not able to understand is by the time index trades below, 100 day MA , a lot of damage had happened in the portfolio. Reason, my portfolio is more volatile than Index. When Index rises 1% , MF rises 2% and vice versa. So how to prevent big draw-down proactively. Preventive approach I mean.
Quarterly Rebalance: I agree it’s contradictory to momentum approach. Let system decide.
Differences
Filtering on fundamentals: I am following a pure price momentum strategy. Fundamental analysis might complicate & contradict. May be avoiding micro-cap protects me from hopeless companies.
Smoothness of charts: I am a big believer of this pattern. I have seen steady compounders and top wealth creating company’s exhibit this pattern. Smoother charts have some correlation with being good. Honestly I don’t know why
Thats all right. These differences are just going to affect your entry. Entries are the least important part of momentum trading. You have got the more important bits figured out. Just have a think about the effect of retrospection on your smoothness of chart criteria.
Regarding Relative Index: Its main use is to keep you out of the market when the overall trend is down. It won’t protect you from your existing positions to a great extent.
Momentum will make you money in the long term. Treating it as an experiment for 1 year might result in disappointment. Especially if you already skeptical about it and more so in the current market conditions when Nifty PE is over 24.
Capitalminds has an article on this and according to their backtest, the strategy has done quite well. Accordingly, I have created a screener for the Nifty 100. It looks into positive returns for the past 1 year and 6 months as well as moving averages. It then divides the screened stocks by their 1-year volatility, to get a volatility adjusted momentum screener.
Hi…While taking entry, as you have suggested to take a pick at fundamentals …but will that improve the returns on momentum strategy? because many times, as mentioned by @hitesh2710 , many times despite bad fundamentals prices of stocks increase in momentum while many times fundamentals are good and still price corrects…If we are exiting on momentum basis , by stop losses, doesnt it make sense to make entry purely on the basis of momentum only?
I think, we can do momentum/trend investing in many ways. One can add FA to TA like Dr. Hitesh does, or simply buy and sell based on rules. With entries and exits too, we can rely on TA or add FA.
I think it all boils down to the objective of doing this, and how much are we doing this with. Doing something like this based on TA alone with all of our allocation will be tough. So if the objective is to make some profit, relatively quicker than with investing, with limited allocation and strict SL, with a plan. Then we can experiment, create, tinker and update setups. Just like with investing, this too will evolve over time, as there is a lot of learning and trying with results surprising on both sides.
Frankly people are confused about momentum investing with Technical analysis based investing.
Momentum Investing has nothing to do with Technical analysis, neither with fundamental analysis.
Momentum is just based on increasing trend in price…follow till it moves up and quit once price chnages direction. Its that simple. Just follow price…no fundamnetal, no technicals. Now if you want to complicate things, then offcourse you can blend everything together, then fundamental can come, then tehcnical can come, then chart patterns can come, then stage analysis can come then waves can come…Everthing will make it a khichadi and nothing is wrong with eating khichadi, but then its not Momentum investing.
Adding value, quality factor to momentum has not been shown to add value in many research papers.
I have shared a repository of momentum research on my blog. You will find some research related to your Q in this.
I usually call it creating khichdi of factors, it only reduces the targeted factor exposure and reduces returns. Might help in DDs, volatility though.
There are two ways to assimilate multiple factors in a PF, one is to maintain different systems with different allocations to each. The other is to mix ranks of multiple factors in a variety of ways. Both reduce returns.
So how do we define momentum? If we have to define momentum, even for ourselves, how do we do that? There has to be some criteria, some quantitative definition, even just for ourselves. And if such quantitative systems are created, many do back tests for these systems. TA can be added as another layer to these systems, we can reject or allocate more based on the charts, this is discretion, but it can help. I personally don’t buy at ATHs, because I have no fundamental knowledge of these companies, so I don’t know if price can go above or not, my TA understanding cannot help here.
We do what works for us, and if we are making profit, and even if we cannot explain lucidly about our process, but if we are doing it for a while, and are in profits, and if we are reasonably confident that we can continue doing it for extended periods, I guess then all is good, and this can be called as an edge too. And all of this evolves with time, as we gain new knowledge, understanding and modifications, also creating new things.
Just like investing, this is a journey too, but unlike investing which is called as boring by some, this is very exciting, so there is that
And I am sure you cannot deny this thread, go through it again, even if you have read it before, you will definitely gain many insights, if you want to experiment or try.
