Use absolute momentum if you want to make money | stockbee

6/01/2017

Use absolute momentum if you want to make money

There are two kinds of momentum: relative and absolute momentum.
Relative Momentum
Relative momentum is used as rank function to find stocks performance relative to other stocks or an index.
Relative momentum in simplest form is ratio of stocks price % change for a given period to indexes or others stocks price % change.
The IBD relative Strength ranking method is an example of that. It ranks stocks from 99 to 1 based on a weighted average momentum.
That is one way to look at momentum, but if you want to make money trading stocks learn about Absolute Momentum.
Absolute Momentum
Absolute Momentum does not rank stock in relation to other but identifies the direction and strength of momentum.
Absolute momentum compares stocks current momentum to its past momentum and tells you when a stock has started momentum phase and when it ends it.
Absolute Momentum tells you when stock is in momentum phase and it also tells you the velocity of the momentum move.

Absolute momentum allows you to identify start of a momentum phase and get on the trend earlier.
Best way to understand relative momentum and absolute momentum is by taking an example of a bear market.
Let us say we are in protracted bear market where every stock in US market is down at least 30%.
Now in that market IBD relative ratings will still give you top 50 stocks by momentum, But each of those stock will be in downtrend.
Absolute momentum scans like TI65 , MDT, DT, or even Minervini Trend Template will give you 0 stocks meeting momentum criteria.
Relative momentum by itself is not much of use that is why even I BD uses Relative momentum + absolute momentum (stock has to be within 15% of 52 week high) to find stocks.
For whatever reason IBD ranked the stocks the way it did and popularised it , but you don't have to be lemming and follow it blindly if there are better ways to find momentum.

If you want to make money trading learn about absolute momentum. It will allow you to find stocks right at start of their momentum phase.