Momentum

Methodology

Last updated: 2026-02-20

Momentum SaaS measures the strength of price trends using a composite scoring system grounded in decades of academic research. Every stock receives a score from 0 to 100 — think of it as a speedometer for trend strength, not a GPS telling you where to go.

1. How Scores Work

Each stock is scored daily on a scale of 0 to 100 using end-of-day price and volume data. The score is a weighted composite of five momentum components, each measuring a different aspect of a stock's recent trend. The five components and their weights are: - 12-month return (35%) — the core momentum signal - 6-month return (20%) — intermediate trend confirmation - 3-month return (15%) — recent momentum shift detection - 52-week high proximity (10%) — distance from the annual high - Volume quality (20%) — favors early-stage momentum Within each component, stocks are ranked against the full universe and converted to a 0-100 percentile. The final composite score is the weighted average of these five percentile ranks. Scores are classified using a traffic light system: - Strong (70-100): The stock shows robust upward momentum across most timeframes. - Caution (40-69): Mixed signals — some timeframes positive, others weakening. - Weak (0-39): Recent price trends are broadly negative or deteriorating. This approach builds on the cross-sectional momentum factor first documented by Jegadeesh & Titman (1993), which has since been validated across 47+ countries and multiple asset classes.
Strong70 – 100Robust upward momentum
Caution40 – 69Mixed signals
Weak0 – 39Negative or deteriorating trend

2. What Each Component Measures

12-month return (35% weight) The most heavily weighted component captures the core momentum factor — how much a stock's price has risen or fallen over the past year. Academic research consistently shows that 12-month trailing returns are the single strongest predictor of near-term momentum continuation. 6-month return (20% weight) The intermediate timeframe acts as a confirmation signal. When both the 12-month and 6-month returns are positive, the trend is more likely to persist. When they diverge, it can signal a transition. 3-month return (15% weight) The shortest price-based lookback detects recent shifts in momentum. A stock may have strong 12-month returns but declining 3-month performance — an early warning that the trend may be fading. 52-week high proximity (10% weight) Research by George & Hwang (2004) found that stocks near their 52-week high tend to continue rising, partly due to psychological anchoring — investors are reluctant to buy at all-time highs, creating an underreaction that momentum strategies can capture. Volume quality (20% weight) This component measures inverse relative turnover: the ratio of a stock's long-term average trading volume to its recent average. Stocks with lower recent turnover relative to their historical norm score higher. Why? Research by Lee & Swaminathan (2000) showed that low-turnover momentum stocks — those in the early stages of their trend with relatively quiet trading — outperform high-turnover momentum stocks by a meaningful margin. Late-stage, high-volume momentum stocks tend to reverse. This component helps identify trends that are more likely to persist.

3. Backtested Performance

The current scoring formula was selected after extensive backtesting across 10 candidate strategies. The chosen formula (internally designated BT-B2) delivered the strongest risk-adjusted returns across 89 Monte Carlo simulations. Key results (median across 89 simulations): - Annualized return (CAGR): 27.1% (range: 18.9% to 43.0%) - Sharpe ratio: 1.40 (range: 0.81 to 1.69) - Monthly hit rate: 68.6% (range: 64.4% to 73.1%) - Maximum drawdown: 20.8% (range: 15.8% to 27.2%) In practical terms, the strategy produced positive monthly returns roughly two out of every three months — but was negative one out of three. At its worst, the portfolio declined approximately 21% from peak to trough before recovering. Backtest methodology: - Universe: 16,382 stocks from 14 global exchanges - Period: January 2010 to December 2025 (192 months) - Portfolio: 50 stocks, equal-weighted, rebalanced monthly - Transaction costs: 10 basis points round-trip - Simulations: 89 successful runs out of 100 attempted (Monte Carlo random date sampling) Important: These are hypothetical backtested returns, not live trading results. Past performance does not guarantee future results. Backtested data is subject to survivorship bias, as the stock universe is based on currently listed securities.

Median CAGR

27.1%

Range: 18.9% – 43.0%

Sharpe Ratio

1.40

Range: 0.81 – 1.69

Monthly Hit Rate

68.6%

Range: 64.4% – 73.1%

Max Drawdown

20.8%

Range: 15.8% – 27.2%

Past performance does not guarantee future results. Hypothetical backtested results across 89 Monte Carlo simulations, January 2010 – December 2025.

4. Limitations

A speedometer, not a GPS Momentum scores measure trend strength — how fast a stock is moving, not where it is heading. A high score means strong recent momentum; it does not mean the stock is undervalued, fundamentally sound, or likely to keep rising. Momentum crash risk Momentum strategies can experience sharp, sudden losses during market regime changes. Research by Daniel & Moskowitz (2016) documented that momentum portfolios are vulnerable to "crashes" when markets reverse quickly — for example, during recoveries from bear markets. Scores can drop rapidly during these events. Survivorship bias The backtested performance data uses a universe of currently listed stocks. Companies that were delisted due to bankruptcy, mergers, or other events are not included. This tends to make historical returns look slightly better than they would have been in real-time. One factor among many Momentum is one of several well-documented factors in academic finance (alongside value, quality, size, and low volatility). No single factor works in all market environments. Momentum scores should not be the sole basis for investment decisions — they are one piece of a broader research process.

5. Frequently Asked Questions

How often are scores updated?
Scores are updated daily using end-of-day price and volume data. The scoring pipeline runs after market close, so scores reflect the most recent full trading day.
Why might a stock score change suddenly?
Earnings releases, sector rotations, broad market selloffs, or large volume spikes can all cause rapid score changes. Because scores are relative rankings against the full stock universe, a stock can also move if the stocks around it change significantly.
What does a low score mean?
A low score means the stock has weak recent momentum relative to other stocks in the universe. It does not necessarily mean the stock is a bad investment — it may be undervalued, in a temporary dip, or in a sector rotation. Momentum measures trend strength, not fundamental quality.
Is this financial advice?
No. Momentum SaaS is an educational and informational tool. Scores reflect historical price trends and do not predict future performance. Nothing on this platform constitutes a recommendation to buy, sell, or hold any security. Always conduct your own research or consult a qualified financial advisor before making investment decisions.
How is this different from analyst ratings?
Analyst ratings are forward-looking opinions based on fundamental analysis — earnings forecasts, industry outlook, and company-specific factors. Momentum scores are backward-looking measurements of recent price trends. They answer different questions: analysts try to predict where a stock is going, while momentum scores measure where it has been trending.
Why does volume matter?
Academic research shows that momentum stocks with relatively quiet, low-turnover trading tend to sustain their trends longer than those with high trading volume. High-volume momentum stocks are often in the late stages of their trend and more prone to reversals. The volume quality component helps identify early-stage momentum that is more likely to persist.

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