Before you start building a screen you need to understand what factor based trading strategies are and how momentum, which is a subset of factors, has performed over the centuries.
Below is a repository of all the research material I have collected, this is, by no means complete, I keep adding new materials as I chance upon them. This will definitely give you a good idea of the strategy before starting.
Beyond this you should listen to the podcasts on YT by channels like ‘Chat with Traders”, “Top Traders Unplugged” where best of the best who have been doing this for decades share their knowledge of trend following systems.
So moving on to the screener, google sheets is sort of the easy way of doing this. Do note that google sheets will not allow you to do back tests on your strategy. For that you need to know a coding language and obtain clean corporate action adjusted data from the exchanges.
Most of these data feeds are paid, you can build a system where you download the entire historical data from a feed once and then append the data from google sheets everyday.
More creative people can scrape the data from exchange websites for free. If I remember correctly there was a CFA society video by Parijat Garg on this subject.
Back testing is sort of important when you add certain conditions to your strategy, but it is not the holy grail. So you can do without back testing if you have faith in your system.
Here is a sample of what I have built on google sheets. This is just to tell you that if you are decent in excel, you can build it yourself and run your momentum strategy without knowledge of coding.
To give a few pointers,
- Define you stock universe – Can be 50/100/200/500 or all stocks.
- Get the tickers from NSE website.
- Define your lookback period.
- Get the price data for each of the stocks in your universe for the above lookback period and current price.
- Calculate the % change in price and sort them based on this.
The above is the simplest form of momentum. You can even build a ranking system based on Sharpe, Sortino and various other factors mentioned in the repository above. But it will require some more data in the sheets.
Besides this you will also have to make decisions on your portfolio diversification, weightage, entry/exit strategy, rebalancing frequency etc.
If you have read till here, obviously you are interested in DIY momentum strategy but just in case someone is completely new to the momentum bandwagon, and you are intimidated by sheets, there are a lot of small case providers who will run the strategy for you for a fee. Most people want to DIY because these small cases are black boxes and their detailed strategy is unknown. They are also relatively new and it is difficult to know how they will perform in a downturn. Lastly, some even find them costly.
Depending on your portfolio diversification, if you want to follow the system perfectly you will need 2-6 lacs capital to start with. This figure is wide, the more you will diversify the more capital you will need. Some periods will require less capital and some more. If you are really constrained on starting capital, you should not be doing this in the first place. If you are still adamant you can remove the most expensive scrips till the portfolio reaches your capital level.
To conclude with the important question, why momentum strategy? Well, the answer is simple. It provides a good strategy diversification to your portfolio. No strategy works all the time just as no asset class works all the time.
- Please do not construe this post as an investment advice. This is for educational purpose only.
- No investment capital is being solicited from the readers of this post.
- Momentum based trend following is the holy grail, panacea of making money. Be aware of it.
- Beware of momentum crashes.