Trend vs. Momentum: Understanding the Differences

Trend vs. Momentum: Understanding the Key Differences and Why They Matter 

In the world of investing, “trend” and “momentum” are often mentioned together, sometimes even used as synonyms. Yet, while they are related concepts, they serve distinct purposes in an investment strategy. Understanding the difference can help make better informed decisions for a portfolio.

What are Trend and Momentum? 

 Let’s break down each term: 

• Trend: This refers to the general direction in the price movement of a single asset over a certain period. When an asset has a trend, it moves upward or downward consistently based on its own historical performance. (also called Time Series Momentum) Investors use trend-following strategies to capitalize on this directional movement. 

• Momentum: Momentum, on the other hand, focuses on relative performance. Instead of looking at a single asset in isolation, momentum evaluates multiple assets to identify the strongest performers within a group. In other words, it’s a “relative trend” - the asset that has grown the most relative to others. (also called Cross-Sectional Momentum)

Visualizing the Difference 

The following graph shows three lines, representing different assets over time: 

• Trend would focus on each line individually. For example, if the red line is moving upward, a trend-following strategy might invest in this asset based on its upward slope.

• Momentum on the other hand looks across all the assets (lines) and identifies the best relative performer. Here, the blue line shows the strongest momentum, as it has the highest relative growth compared to the others. A momentum strategy would buy this asset or outweigh it. 

Conclusion 

Trend and momentum are powerful methods for investing, each bringing a unique perspective to portfolio management. Leveraging both can enhance your portfolio’s performance potential and adaptability.

At NDT Capital Partners, we use these strategies to help our clients navigate complex markets with robust and data-driven strategies. Interested in learning more about how momentum and trend could work for your portfolio? We’d be happy to discuss this further. 

Sources:

Caia, A. B. C. (2023, December 14). What’s the difference between momentum and trend following? Venn by Two Sigma. https://www.venn.twosigma.com/
insights/momentum-and-trend-following

Hedder. (n.d.). 4 Differences between momentum trading and trend following strategies. Nasdaq. https://www.nasdaq.com/articles/4-differences-between-momentum-trading-and-trend-following-strategies

Jegadeesh, N., & Titman, S. (2023). Momentum: Evidence and insights 30 years late. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4602426

Kolanovic, M., AC (Global), Zhen Wei, PhD (Asia), Kolanovic, M., Zhen Wei, CFA, Kolanovic, M., & Zhen Wei, CFA. (2015). Momentum strategies across asset classes. https://www.cmegroup.com
/education/files/jpm-momentum-strategies-2015-04-15-1681565.pdf

Wiest, T. (2022). Momentum: what do we know 30 years after Jegadeesh and Titman’s seminal paper? Financial Markets and Portfolio Management, 37(1), 95–114. https://doi.org/10.1007/s11408-022-00417-8