A Simple Momentum Trading Strategy (Backed By Data)

Key Concepts

• Momentum Trading: A strategy that involves going long on markets exhibiting the strongest upward price movement over a defined period.
• Rate of Change (ROC): An indicator used to measure the percentage change in price of an asset over a specified time frame, typically 12 months in this system.
• 200-Day Moving Average (MA): A technical indicator used to identify the overall trend of an asset. An asset trading above its 200-day MA is considered to be in an uptrend.
• Exchange Traded Funds (ETFs): Investment funds traded on stock exchanges, offering diversification across various asset classes.
• Drawdown: The peak-to-trough decline during a specific period for an investment, fund, or market.
• Position Sizing: The amount of capital allocated to a single trade, crucial for risk management.

Momentum Trading System Overview

This training introduces a momentum trading system focused on ETFs that has generated a total return of 535% over the last 19 years. The system aims for an approximate annual return of 10% with a maximum drawdown of 22%. This risk profile is presented as comparable to a buy-and-hold strategy for the S&P 500 (which has an 8-10% annual return and a 55%+ drawdown over 20 years) but with significantly lower risk. A key advantage highlighted is the minimal time commitment required, estimated at only 5-10 minutes per month, making it suitable for passive income or retirement trading.

Momentum Trading Concept

Momentum trading is defined as a strategy that identifies and invests in markets with the strongest upward price momentum. Momentum is conceptualized as the "acceleration" of an asset's price, measured by its percentage increase over a given period (e.g., 2, 6, or 12 months). The underlying principle is that markets showing strong momentum are likely to continue their upward trajectory. The system holds positions until momentum stalls or shows signs of weakness.

ETF Momentum Trading System Details

This specific system trades ETFs, offering exposure to different asset classes. The ETFs used are:

• GLD: Gold
• SPY: S&P 500
• TLT: Treasury Bonds
• DBC: Commodities

The trading timeframe is monthly, with trades executed on the first trading day of each month.

Risk Management:

• Capital Allocation: 50% of capital is allocated to each ETF.
• Maximum Positions: A maximum of two positions are held simultaneously.

Trading Rules

The system follows three simple rules:

1. Uptrend Confirmation: The ETF must be trading above its 200-day moving average. This ensures that only assets in an established uptrend are considered, aligning with the goal of capturing strong momentum.
2. Momentum Ranking: For ETFs that meet Rule 1, they are ranked based on their Rate of Change (ROC) over the last 12 months. This identifies the ETFs with the highest price performance.
3. Position Selection: The top two ETFs from the ranking are selected for long positions.

Practical Implementation with TradingView

The video demonstrates how to implement these rules using TradingView:

1. Watchlist Creation: Create a watchlist named "ETFs" and add the tickers GLD, SPY, TLT, and DBC.
2. Date of Execution: Trades are to be executed on the first trading day of each month.
3. Applying the 200-Day Moving Average: Add the 200-day MA indicator to the charts.
   • Example (July 1st):
     • GLD: Above 200-day MA (Considered)
     • SPY: Above 200-day MA (Considered)
     • DBC: Above 200-day MA (Considered)
     • TLT: Below 200-day MA (Eliminated)
   • This leaves GLD, SPY, and DBC as potential candidates.
4. Applying the Rate of Change (ROC) Indicator: Add the ROC indicator, setting the period to 12 months.
   • Example (July 1st, Monthly Timeframe):
     • GLD ROC (12 months): 34%
     • SPY ROC (12 months): 13%
     • DBC ROC (12 months): -1%
   • The top two performing ETFs are GLD (34%) and SPY (13%).
5. Trade Execution: Go long on GLD and SPY.
6. Position Sizing: Allocate 50% of capital to GLD and 50% to SPY (e.g., $5,000 each for a $10,000 portfolio).

Exit Strategy

An ETF is sold under two conditions:

1. Drop from Ranking: If an ETF falls out of the top two strongest performers in the monthly ranking.
2. Below 200-Day MA: If an ETF's price falls below its 200-day moving average.

If the selected ETFs remain in the top two and above the 200-day MA, they are held. This can lead to periods with no new trades, further reducing the monthly time commitment.

System Performance and Results

The backtest for this system runs from 2006 to the present, as some ETFs were not available before then. This period includes major market events like the 2008 financial crisis, the Russia-Ukraine war, and COVID-19.

• Total Return (Since 2016): 535%
• Annualized Return (Average): Approximately 10% per year.
• Winning Rate: Close to 60%.
• Losing Rate: Approximately 40%.
• Payoff Ratio: 1.13 (Average winners are slightly larger than average losers).
• Maximum Drawdown: 22%.

Performance during Crises:

• 2008 Financial Crisis: System was up 15%.
• 2020 COVID-19: System was up 18%.
• 2022 Russia-Ukraine War: System was down 3%.

The video notes that losing years have been shallow, typically single-digit losses. A "trading hack" to reduce losing years is promised for later in the training.

Pros and Cons of the ETF Momentum System

Pros:

• Minimal Time Required: 5-10 minutes per month.
• Low Correlation to Stock Market: Can generate profits even during stock market downturns by shifting to safe-haven assets like bonds or gold. This is because the system identifies performing assets, which may not be stocks during bearish periods.
• Systematic and Rule-Based: Eliminates emotional decision-making.

Cons:

• Low Action/Excitement: May not appeal to traders seeking frequent trading activity.
• Average Returns (for this ETF system): While 10% annual return is solid, it's not exceptionally high. However, this is balanced by the low drawdown. The presenter clarifies that momentum trading in stocks can yield higher returns.

Conclusion and Further Resources

The ETF momentum trading system presented is a low-maintenance, risk-managed strategy that has historically outperformed buy-and-hold approaches in terms of risk-adjusted returns. The system's ability to navigate market downturns by rotating into performing assets is a significant advantage.

The presenter offers a free training at tradingwithraina.com/go which includes:

• Three rule-based trading strategies backed by data (including the one just taught).
• Detailed trading rules, entries, exits, and risk management.
• Chart examples.
• PDF slides and trading strategy cheat sheets.
• Backtest reports for all strategies.