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Time-series momentum

Trade a market on its own past return · 8 min

FreeGoal: Trade a market on its own past returnBefore this: Cointegration basicsFurther reading: Carver, Systematic Trading
Price against its own price twelve months earlier
64861090299
  • Close
  • Close twelve months earlier

Solid line above the dashed line: the 12-month return is positive.

Predict first

A market is up 30% over the last twelve months but fell 5% last month. A 12-month time-series momentum rule is…

Time-series momentum trades each market on its own past: long if its return over the lookback is positive, short if negative. It is a trend rule written in one line, close in spirit to a moving-average crossover.

signal = sign(Cₜ ÷ Cₜ₋ₗ − 1) · position = signal × volatility-scaled size

It earns when drifts persist longer than the lookback needs to detect them, and it pays at every turn: after a reversal it stays on the wrong side until the lookback return changes sign. Short lookbacks turn sooner but react to noise; long ones are steadier but late. In a range the sign flips back and forth and costs pile up.

Try it: lookback and market type
0.76×1.28×1.80×01261
  • Price (rebased)
  • Momentum system
-10101261
  • Position: +1 long, −1 short
Sharpe ratio0.73
Return a year11.0%
Volatility16.0%
Max drawdown-25.3%
Trades24
Winners29%

Generated markets, not real data. They show how a rule depends on the market it meets; they do not predict how real markets behave.

Worked calculation

Signal and size from a 12-month return

Close twelve months ago, today
80.00, 92.00
12-month return
92 ÷ 80 − 1 = +15%: long
Volatility target, market volatility
10%, 20%
Weight
10% ÷ 20% = 0.5 × capital
On $200,000 of capital
a $100,000 long position
Check yourself
3 questions

What usually happens to a 60-day momentum rule in a sideways market?

A market rose 40% in its first nine months and then fell 15% in three. A 12-month rule is still long. Why?

A market closed at 120 twelve months ago and at 111 today. What does a 12-month momentum rule hold?

Missed questions come back for review after one day, then three, then a week.

Practice

A market closed at 50 twelve months ago and at 55 today. What is its 12-month return (in %)? A time-series momentum rule holds the sign of that return.

Hint: Return = today ÷ then − 1.

More in Drills →

Closing round

Three years of a fresh generated market are on screen; the next two years do not exist yet. Tune the rule on what you can see, commit to two predictions, then generate the future.

0.76×0.88×1.00×0625
  • Your rule so far
Sharpe before split-0.63
Return before split-20.9%
Max drawdown before-23.9%
Dickey–Fuller t (log price)-2.29

Over the next two years, after costs, this rule will…

What kind of market is this?

Generated markets, not real data. They show how a rule depends on the market it meets; they do not predict how real markets behave.

Want to feel it candle by candle? Ride a downtrend in the bear-market scenario →