2. Momentum: betting that what goes up keeps going up

Level 5: Momentum, Mean-Reversion and Pairs Trading Strategies

Momentum strategies start from a premise different from trend strategies, though related: assets that have performed well recently tend to keep doing so, and those that have performed badly tend to keep doing badly, over a given period.

Strategies based on momentum indicators use tools such as the RSI, the MACD or the stochastic oscillator — the same indicators you already used in earlier levels — to measure the strength and speed of the price's recent movement.

The Rate of Change (ROC) compares the current price with the price a given number of periods ago, to determine whether the asset has momentum: a positive and rising ROC suggests the upward impulse is accelerating, not merely holding.

Time-series momentum is the purest version of this idea: if an asset has trended positively over a given period, that trend is expected to continue, based solely on the asset's own price history, without comparing it with anything else.

And high-frequency momentum strategies take this same idea to far shorter time frames, seeking to capture rapid shifts in impulse over seconds or minutes — the turf of algorithmic traders with low-latency infrastructure, not of a home-made script.

Applying any of these variants successfully demands real risk management: momentum can reverse abruptly, and a strategy that buys whatever is rising with no exit control can end up trapped buying right at the top.