Choosing a Price Momentum Measure and Lookback Period
Article Quant Q&A · Author: Sunv
Summary
The document considers how to calculate stock price momentum from weekly observations and whether short lookbacks, such as several weeks, are standard. It presents a simple measure based on the difference between the current closing price and the close a chosen number of periods earlier. It also notes that momentum can be represented by many indicators, each with its own definition and parameters, so there is no single universally accepted calculation or period.
Lookback choice depends on the market, sector, season, prevailing conditions, and intended use. The answer says momentum tends to be more suited to trending markets and may work poorly in directionless conditions. It cites a trading-strategy reference describing differences in performance across individual markets and seasonal behavior, but offers no universal empirical rule. A momentum indicator alone is not a complete strategy; its usefulness and parameters need to be assessed in the context of a trading plan.
Key ideas
- A basic price momentum measure compares the current close with the close a selected number of periods earlier.
- There is no universal standard for the momentum indicator or its lookback period.
- Lookback settings should reflect the market, sector, seasonal behavior, and intended use.
- Momentum indicators may be less effective when prices are not trending.
- An indicator by itself does not define a complete trading strategy.
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Full text
# Calculation of price momentum using weekly price observations # Calculation of price momentum using weekly price observations In an empirical analysis I'm trying to predict stock returns using different firm characteristics. I would like to use price momentum as an explanatory variable, but I'm not quite sure how to calculate the price momentum with weekly prices for each stock. My questions are: - is there a standard for calulating price momentum when using weekly prices? - what is the typical time frame, for instance is it sensible to calculate price momentum over the last 4 and 8 weeks? ## Answer by Shahar (score 1) https://quant.stackexchange.com/a/14555 I will try to answer both of your questions together. First, regarding > a standard for calculating price momentum I would say no, there is no universal standard. In addition to what is simply called the momentum indicator (which @chjortlund described in his answer), there are dozens of additional momentum indicators, and each puts an emphasis on something else (at the end of this answer I've pasted a list of momentum indicators that one platform offers). Of course, each different indicator also has one or more parameters, most importantly the number of periods. There is no magic number of periods, because it really depends on many factors, such as the sector and market (e.g. retail or technology), season, and broad market sentiment. Momentum indicators work great in trending markets, but generally do not perform well when the market is going nowhere. For example, Katz and McCormick [2000] report that > Even though the momentum model performed more poorly on the entire portfolio, it performed better on a larger number of individual markets than did the crossover model. The momentum model, if traded on markets with appropriate seasonal behavior, can produce good results. [The Encyclopedia of Trading Strategies. p 171] Finally, no indicator (in and of itself) is a complete trading strategy. So the indicator you choose and its parameters will also depend on how you intend to use them. What might work well for retail stocks in the holidays might not work as well for energy stocks in summer. What seems to hit home runs when there's a bull market might be very disappointing during a recession. So again, I am sorry I could not provide the magic number: it is all about adaptability. Good luck! ``` ADX - Average Directional Movement Index ADXR - Average Directional Movement Index Rating APO - Absolute Price Oscillator AROON - Aroon AROONOSC - Aroon Oscillator BEARP - Bear Power BOP - Balance Of Power BULLP - Bull Power CCI - Commodity Channel Index CMO - Chande Momentum Oscillator DMI - Average Directional Movement Index DX - Directional Movement Index FORCEI - Force Index KAIRI - Kairi KDJ - Random Index LAGACS1 - Laguerre-ACS1 MACD - Moving Average Convergence/Divergence MACDEXT - MACD with controllable MA type MACDFIX - Moving Average Convergence/Divergence Fix 12/26 MFI - Money Flow Index MINUS_DI - Minus Directional Indicator MINUS_DM - Minus Directional Movement MOM - Momentum MURRCH - Murrey Channels OSMA - Moving Average of Oscillator PERSBBANDS - Percent Bollinger Bands PLUS_DI - Plus Directional Indicator PLUS_DM - Plus Directional Movement PPO - Percentage Price Oscillator RMI - Relative Momentum Index ROC - Rate of change : ((price/prevPrice)-1)*100 ROCP - Rate of change Percentage: (price-prevPrice)/prevPrice ROCR - Rate of change ratio: (price/prevPrice) ROCR100 - Rate of change ratio 100 scale: (price/prevPrice)*100 RSI - Relative Strength Index RVI - Relative Vigor Index SMI - Stochastic Momentum Index STOCH - Stochastic STOCHF - Stochastic Fast STOCHRSI - Stochastic Relative Strength Index TD_I - Tom DeMark Indicator TRIX - 1-day Rate-Of-Change (ROC) of a Triple Smooth EMA ULTOSC - Ultimate Oscillator WILLR - Williams' %R ``` ## Answer by chjortlund (score 0) https://quant.stackexchange.com/a/14547 To my knowledge do you just use the closing prices for the period you want to calculate the momentum for. ``` M = CP - CPn ``` Where: ``` M = Momentum CP = Closing price in 'current' period. CPn = Closing price n periods (weeks in this case) earlier. ``` The optimal time frame really depends on, your, or your algos, preferred time frame.
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