Momentum Strategy

The Momentum Strategy is a trend-following strategy that buys when price is trending upward and sells (or shorts) when price is trending downward. It aims to "ride the wave" of price movements.

How It Works

The strategy calculates momentum by comparing the current price to a price from N trades ago. If momentum is strong and positive, it goes long. If momentum is strong and negative, it goes short. It stays out of the market when momentum is weak.

Trading Logic:

• Waits until at least lookback_window trades have occurred before trading

• Prevents trading with incomplete data

• Calculates momentum (positive = up, negative = down)

• When momentum > momentum_threshold:

  • No position → BUY (enter long position)

  • Currently short → BUY (close short and flip to long)

  • Already long → Do nothing (stay in position)

• When momentum < -momentum_threshold:

  • No position → SELL (enter short position)

  • Currently long → SELL (close long and flip to short)

  • Already short → Do nothing (stay in position)

• When -momentum_threshold ≤ momentum ≤ momentum_threshold i.e. Weak Momentum (Neutral):

  • No action taken

  • Maintains current position (or stays out if no position)

Parameters

lookback_window (default: 10)

• How many trades back to compare the current price against

• Larger window = longer-term momentum, slower to react

• Smaller window = shorter-term momentum, faster reactions

momentum_threshold (default: 0.005 = 0.5%)

• Minimum percentage change required to trigger a trade

• Acts as a filter to avoid trading on weak signals

• Example: 0.005 means price must move at least 0.5% to trade

order_size (default: 100)

• Dollar amount to trade when entering/exiting positions

initial_balance (default: 10000)

• Starting capital for the strategy

Example Scenario

Setup: lookback_window=10, momentum_threshold=0.005 (0.5%)

Trade sequence:

Trades 1-9: No action (not enough data yet)

Trade 10:

• Current price: $100, 10 trades ago: $100

• Momentum: 0% → No action (below threshold)

Trade 20:

• Current price: $106, 10 trades ago: $100

• Momentum: 6% (> 0.5% threshold) → BUY (go long)

Trade 30:

• Current price: $107, 10 trades ago: $104

• Momentum: 2.9% (> 0.5% threshold) → Stay long

Trade 40:

• Current price: $102, 10 trades ago: $107

• Momentum: -4.7% (< -0.5% threshold) → SELL (close long, go short)

Trade 50:

• Current price: $103, 10 trades ago: $103.2

• Momentum: -0.19% (within threshold) → Stay short (no action)

Key Differences from Grid Strategy

• Grid Strategy: Mean-reversion (buys dips, sells rallies) - assumes price oscillates

• Momentum Strategy: Trend-following (buys strength, sells weakness) - assumes trends continue