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What is Momentum Investing and How to Automate It

Have you ever noticed how winning stocks tend to keep winning, at least for a while? Or how certain funds seem to ride waves of success that last months or even years? There’s actually a well-documented investment strategy built around this very observation, and it’s called momentum investing.

The good news? You don’t need to be glued to your screen watching stock tickers, and you certainly don’t need a finance degree from the City. With today’s tools, everyday investors can harness momentum investing principles and even automate much of the process. Let me walk you through exactly what this strategy involves, whether it might suit your goals, and how you can set it up to run largely on autopilot.

What Exactly is Momentum Investing?

Momentum investing is based on a simple but powerful idea: assets that have performed well recently tend to continue performing well in the near future, while poor performers tend to keep underperforming. Rather than trying to pick undervalued bargains (that’s value investing), momentum investors essentially follow the trend.

Think of it like spotting which direction a river is flowing and swimming with the current rather than against it. You’re not predicting where the water will go next week—you’re observing where it’s already heading and positioning yourself accordingly.

The Academic Evidence Behind Momentum

This isn’t just folk wisdom or trader intuition. Momentum has been extensively studied by academics since the early 1990s, when researchers Jegadeesh and Titman published groundbreaking work showing that buying recent winners and selling recent losers generated significant returns.

Since then, momentum effects have been documented across:

• Individual stocks in markets worldwide
• Bonds and fixed-income securities
• Currencies and foreign exchange
• Commodities like gold and oil
• Entire country stock markets

The persistence of momentum across different asset classes and time periods suggests it’s a genuine market phenomenon, likely driven by investor psychology—we humans tend to underreact to good news initially, then pile in once trends become obvious.

How Does Momentum Investing Work in Practice?

Traditional momentum investing involves ranking assets by their recent performance (typically over the past 3 to 12 months), then buying those in the top tier while avoiding or selling those at the bottom.

For example, a momentum investor might:

• Look at the performance of various sector ETFs over the past six months
• Rank them from best to worst performers
• Invest in the top two or three sectors
• Review and rebalance monthly or quarterly

The specific “lookback period” (how far back you measure performance) and “holding period” (how long you keep positions) can vary. Many practitioners use a 12-month lookback while skipping the most recent month, as very short-term performance can actually show reversal effects.

Relative vs Absolute Momentum

There are actually two flavours of momentum worth understanding:

Relative momentum compares assets against each other. You buy whatever’s been strongest compared to alternatives. This keeps you fully invested but rotating into strength.

Absolute momentum (sometimes called time-series momentum) compares an asset to its own history or to a risk-free rate. If an asset has positive momentum, you hold it. If momentum turns negative, you step aside into cash or bonds.

Many automated momentum strategies combine both approaches—using relative momentum to pick the best assets, and absolute momentum as a safety valve to reduce exposure during broad market downturns.

The Benefits and Risks You Need to Know

Before you rush to implement this strategy, let’s have an honest conversation about both the potential advantages and the genuine risks involved.

Potential Benefits

• Systematic approach: Rules-based investing removes emotional decision-making, which often trips up individual investors
• Adaptability: Unlike buy-and-hold, momentum can potentially sidestep prolonged bear markets
• Well-documented: Unlike many trading strategies, momentum has serious academic backing
• Automation-friendly: Clear rules make this strategy ideal for automation

Real Risks to Consider

Momentum crashes: Occasionally, momentum reverses sharply. In 2009, for instance, momentum strategies suffered painful drawdowns when beaten-down stocks suddenly surged. This “momentum crash” risk is real and can hurt.

Whipsaw losses: In choppy, directionless markets, momentum signals can flip-flop, generating repeated small losses and trading costs.

Higher turnover: More frequent trading means more transaction costs and potential tax implications. In the UK, this matters less within ISA or SIPP wrappers, but it’s worth considering for general investment accounts.

No guarantees: Past performance truly doesn’t guarantee future results. While momentum has worked historically, there’s no iron law saying it must continue. Markets evolve, and strategies can become crowded.

Capital at risk. The value of investments can fall as well as rise, and you may get back less than you invest. If you’re unsure whether investing is right for you, consider seeking advice from a qualified financial adviser.

How to Automate Momentum Investing in the UK

Now for the exciting part—actually putting this into practice without spending hours each week on analysis. Here are several approaches, ranging from hands-off to more customised.

Option 1: Momentum-Focused Funds and ETFs

The simplest automation is buying a fund that does the momentum work for you. Several ETFs track momentum indices and are available to UK investors:

• iShares Edge MSCI World Momentum Factor UCITS ETF – provides global exposure to momentum stocks
• Invesco EQQQ NASDAQ-100 UCITS ETF – while not explicitly momentum-labelled, tech-heavy indices often exhibit momentum characteristics
• Various factor ETFs – many UK platforms offer access to momentum factor funds

You can set up a regular monthly investment into these through platforms like Vanguard Investor, Hargreaves Lansdown, Interactive Investor, or AJ Bell. This gives you exposure to momentum investing with literally zero ongoing effort beyond the initial setup.

Check the fund’s OCF (Ongoing Charges Figure) and ensure any platform you use is FCA-regulated for your protection.

Option 2: DIY Rules-Based Approach with Alerts

If you want more control, you can create a simple momentum system yourself:

1. Choose a universe of assets (perhaps 8-10 sector ETFs or major market ETFs)
2. Set up a spreadsheet that tracks their 6 or 12-month performance
3. Create calendar reminders to check and rebalance monthly or quarterly
4. Use price alerts from your broker to notify you of significant changes

This isn’t fully automated, but it’s systematic. You spend perhaps 30 minutes once a month reviewing and making any needed changes. Many UK brokers including Interactive Brokers, Trading 212, and IG offer price alert features you can use.

Option 3: Using Trading Bots and Automation Platforms

For more sophisticated automation, several tools can help execute momentum strategies with minimal intervention:

Trading 212 Pies: While not pure momentum automation, you can create custom “pies” of momentum ETFs and set