Adjusting the Momentum Strategy for Small Investors
Researchers recommended investing according to the long only momentum (MOM) strategy to generate excess returns for private investors. The general problem of this study was that it was unclear when to enter and when to exit declining financial markets to avoid larger losses and to improve the overall performance with the MOM strategy. Therefore, it was important to understand the influence of a timing indicator on the MOM strategy. The purpose of this study was to examine the relationship between different moving average (MA) settings, the MOM strategy, and the performance of the returns from the construction of small U.S. stock portfolios. The research question was what MA setting as a strategy adjustment could improve the MOM strategy performance for small portfolios of U.S. stocks. A quasi-experimental research design was chosen to answer this research question. For the methods and analysis, simple- and exponential- MA, 2 econometric models, and abnormal Sharpe ratios were computed on the sample basis of 30 Dow Jones Industrial Average (DJIA) stocks. The computations allowed me to determine the optimal trading frequencies for the MA MOM strategy. The key result was that the MA MOM strategy could improve the MOM strategy on average by 0.16% per month. The optimal trading frequency for the MA MOM strategy with $5,000 was tri yearly through which (0.90 - 1.85 %) net monthly return could be achieved. The MOM strategy can be adjusted by a simple moving average (SMA) indicator on a 6 versus 36-month basis as a recommendation. This study might contribute to positive social change by adjusting the MOM strategy, which specifically impacts private investors in declining stock markets to improve the overall performance when trading the MA MOM strategy.