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Trader education, Trend following

Momentum Versus Trend-following

We look at the performance of popular momentum and trend-following strategies in SPY ETF since inception in an effort to identify a winner.


  • Momentum appears to offer smoother and better performance
  • Trend-following may respond better after bear markets

There are many definitions of trend-following and momentum so we will start with what we mean by those terms specifically for the purpose of this brief analysis.


For momentum we use the rate-of-change of closing price. In the analysis we use a 12-month rate-of-change.

Strategy rules: Buy next open if ROC(C,12) > 0 – Sell next open if ROC(C,12) < 0.


We use a 12-month moving average crossover of closing price with price itself.

Strategy: Buy next open of C > MA(C,12) – Sell next open if C < MA(C,12)

Backtest details

Market: SPY ETF from inception to 09/11/2019
Data adjusted for dividends
Timeframe: Monthly
Commissions: $0.01 per share
Equity fully invested
Starting capital is $100K
Monthly returns statistics starting on 01/2007 are included

Backtest results (Click on images to enlarge)


Momentum results


Trend-following results

Below is a table with key performance parameters

Parameter Momentum Trend-following
CAGR +9.7% +8.6%
Max. DD -15.6% -18.2%
Sharpe 0.84 0.80
MAR (CAGR/Max. DD) 0.62 0.47
Trades 7 15
Win Rate 85.7% 53.3%
Payoff 2.91 4.04
2008 return -5.6% +0.2%
2010 return +15% -2.2%
2019 return +5.4% -2.6%

A notable difference is the win rate: 85.7% for momentum versus 53.3% for trend-following. This is an important difference because win rate is ultimately tied to risk-of-ruin. High win rate is always preferable even at a little lower payoff.

Note that in terms of Sharpe ratios the performance of the two strategies appears statistically indistinguishable although CAGR is higher for momentum by 110 basis points. The result is 0.62 MAR for momentum versus 0.47 for trend-following.

Year-to-date momentum is in black while trend-following is in red. However, in 2008 momentum lost 5.6% while trend-following finished nearly flat. The largest difference is in 2010 with 15% return for momentum but -2.2% for trend-following. This relative performance is an indication that momentum adjusted faster to short-term corrections but trend-following behaves better after bear markets. Obviously the samples are small to make any general conclusions and at the same time this analysis focuses on only one market and therefore any results are specific to that.

The conclusion is that for a 12-month window, as defined in the brief article, momentum shows better performance as compared to trend-following.

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Charting and backtesting program: Amibroker


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