What is momentum investing? A plain-language guide
7 Oct 2026 · 2 min read
Momentum investing rests on one simple observation: prices that have been rising for a while often keep rising for a while longer, and prices that have been falling often keep falling. A momentum strategy tries to hold the first group and avoid the second.
The idea in one line
Rank a group of stocks (or ETFs) by how strongly they have been rising, hold the strongest few, and check the ranking again at fixed times.
How a momentum strategy is built
A rule-based momentum strategy answers five questions:
- Universe: which stocks may be considered, for example the Nifty 500 or the Microcap 250.
- Conditions: who is allowed in at all, for example only stocks whose 6-month return is above zero.
- Ranking: how "strong" is measured, for example 6-month return, or return adjusted for how much the price swings.
- Portfolio rules: how many to hold, how often to rebalance, and when a holding is sold.
- Protection: what to do when the whole market turns down, for example move to cash below the 200-day average.
Writing these down as rules, before looking at results, is what separates a strategy from a hunch.
Why "risk-adjusted" momentum
Two stocks can both be up 40% in six months. One got there smoothly; the other jumped around wildly. Many investors prefer the smooth one, so a common ranking divides the return by its volatility. In MomentumScore this is the risk-adjusted momentum factor.
Where momentum goes wrong
- Sharp reversals. When markets turn quickly, yesterday's leaders can fall hardest.
- Costs. Frequent rebalancing means brokerage, taxes and slippage. They add up.
- Overfitting. Tuning rules until a backtest looks perfect usually makes them worse in the future.
A backtest shows how rules would have behaved. It is a way to test an idea, not a forecast.
How to try it
In MomentumScore you describe the kind of rise you want (a fast rocket, a steady climber or a long marathon), pick a universe and test the rules on years of daily NSE data. The robustness check then tells you whether the result depended on lucky dates.