A short YouTube commentary by Adrian Reid explaining why many traders abandon momentum/trend-following systems prematurely. The speaker emphasises that although long-term equity curves for momentum often look strong, these systems spend long periods in drawdown, have relatively low hit rates (around 40–50%), and produce many small losses while deriving returns from sporadic large winners. The speaker also notes that market structure (e.g., a narrow 2023 US stock leadership of ~10–15 large-cap names) can suppress momentum performance for small/mid-cap focused strategies and suggests aligning strategy scope (e.g., participating in large-cap trends) with prevailing market conditions.
Chapters
I think one thing that's important to understand how momentum works. If you look at the long term equity curve, everything looks really, really great. But there's a reason why most people do not trade momentum or trend following. Because the majority of the times you're on a drawdown and it's emotionally very challenging to trade these systems because your hit rate is not that high, is maybe 50%, 40%. You have a lot of small losers and the money lies in the big trades.
So once you're aware of this, you aware of that momentum is the strongest price pattern in the market. Like in the stock market, bond market, commodity market. This will come back as soon as the market conditions are also recovering. Like for example, 2023 was a very special situation where the major US entities made a lot of profit because of a very narrow stock universe like 10 or 15 stocks. And the rest was so. So once you take this into consideration, then it makes sense that the momentum strategies, especially if they want small or mid caps focusing, did not perform particularly well. So there's nothing wrong with the system because the environment just does not provide it. Maybe it makes sense to have a trend following or momentum strategies who is capable of participating in the big market cap stocks, for example, which will help you in the next phase to participate in these movements too. So I think that the more you understand what you're actually trading, like which kind of strategy trading what, the reason for that is, the more you're capable of follow the strategy through.
