Momentum vs. Contrarian
Two opposing philosophies: Following the trend vs. Betting on the reversal.
Momentum Strategy
Momentum assumes that assets which have been rising will continue to rise. It relies on trend persistence and herding behavior. The goal is to buy high and sell higher.
- Follows the herd
- Works best in strong trends
Contrarian Strategy
Contrarian trading assumes that markets overreact and will revert to the mean. The goal is to buy fear (lows) and sell greed (highs), betting against the current move.
- Fades the herd
- Works best in ranges
Common Rules
- Time-Series Momentum: Go long when price > 200-day SMA.
- Breakouts: Buy new N-day highs (e.g., Donchian Channels).
- Confirmation: Require high volume on the breakout.
Risk Management
Use wider stops to allow volatility. Tighten stops only when the trend matures.
Statistical Tool: The Runs Test
Is the market random or trending?
The Runs Test (Wald-Wolfowitz) evaluates if a sequence of price moves is random. It counts 'runs' of consecutive up or down days.
Few Runs
Implies TREND (Clustering). (+ + + + - - -)
Many Runs
Implies MEAN REVERSION (Choppy). (+ - + - + -)