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how to identify momentum stocks
Back to topic: Using data to build factors


July 2024 · 5 min read

Momentum Stocks


The momentum style of trading is one of the most natural investing styles around and yet it lacks a lot of the things that make value and quality investing popular. First and foremost, momentum investing is based on the popular philosophy that the trend is your friend. If certain stocks are having a good run and increasing significantly in price, there must be a reason for it and all else being equal they will most likely keep increasing in value.

Secondly, momentum investing is not based on company financials explicitly - unlike value and quality factors which tend to take into account multiple balance sheet or cashflow statement items. Instead momentum is purely a price-based signal where the underlying hypothesis from momentum believers is that the price of the stock contains all the relevant financial balance sheet items and other market sensitive information.

What data goes into a momentum strategy ?

Given its reliance on price alone, it is therefore logical that all we need to construct a momentum signal is stock price data. Some investors may augment this price data with the underlying volume data and as a result, may weight certain price moves that occurred with large volume as stronger signals.

For someone who wants to start investigating momentum investing strategies themselves, they can easily use python to start downloading yahoo stock price data and start constructing their own strategies (and we give some sample code at the end of this article). However, at STRATxAI we make all this easily available to you so you don't have to, our platform handles it all for you and you can run instant backtests for your strategies.

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