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Trading with the dual momentum system
Let’s say that an investor is using dual momentum to trade in the stock market. The investor has identified two momentum indicators: 12-month price momentum and 6-month trend momentum. The investor is looking to take a long position in the stocks that show strong momentum in both indicators.
The investor begins by analyzing a group of stocks in a particular market sector. After analyzing the 12-month price momentum and 6-month trend momentum of each stock, the investor identifies a stock that shows strong momentum in both indicators. This stock is trading at $50 per share.
The investor decides to take a long position in this stock based on its strong momentum indicators. The investor buys 100 shares of the stock at $50 per share, for a total investment of $5,000.
Over the next several months, the stock continues to show strong momentum in both price and trend indicators. The stock price rises to $60 per share, and the investor decides to take profits. The investor sells the 100 shares at $60 per share, for a total return of $6,000.
The investor has made a profit of $1,000 on this trade, thanks to the strong momentum indicators identified through the dual momentum strategy. By combining two different types of momentum indicators, the investor was able to identify a profitable investment opportunity and…
