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The statistical phenomenon where stocks that recently outperformed tend to keep outperforming in the short-to-medium term — why it happens, and why it can reverse all at once.
Momentum is the statistical tendency of stocks with strong (or weak) recent performance to continue in a similar direction over the short-to-medium term (typically a few months). It's one of the most well-documented findings in academic finance research, and appears to contradict the 'classic' theory that stock prices move entirely randomly.
A few accepted explanations: investors react slowly to new information (underreaction), behavioral herding (investors buy because others are buying), and institutional fund flows that respond to performance over time rather than instantly. Together, these create a temporary continuation in trend, not just random noise.
Momentum tends to reverse sharply and without much warning (a 'momentum crash') when the conditions that fed it change all at once — a sudden interest-rate policy shift, for example. Momentum investors are exposed to the risk of fast, sharp declines precisely because of the same dynamic that created the rise in the first place.
Momentum measures (like rate-of-change, ROC) are part of the Technical Analysis category (25% of the score) — checked together with RSI, MACD, and trading volume, so no single momentum signal tilts the score on its own.
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The information in this guide is intended for general educational purposes only and does not constitute investment advice. Full details on the disclaimer page.