By definition, momentum is the tendency to stay in motion. Momentum investing assumes securities that have performed well relative to their peers (the winners) continue to outperform, while securities that have performed poorly (the losers) continue to under perform.
Concentrate on the winners and circumvent the losers.
What you don’t own can be just as important as what you do own. Instead of buying many assets in small percentages in hopes of diversification, we focus only on those assets that are showing strong risk/reward characteristics and avoid altogether those assets we find unfavorable. Why buy something if you expect it to fall in value?
Stay invested during bull markets and reduce exposure in bear markets.
Markets are made up of investors and investors are people with behavioral biases. One of these biases, known as loss aversion, causes investors to hold onto losers too long and sell winners too quickly. Focusing on momentum should help us to hold onto winners as long as they’re trending positively and sell losers quickly as the reverse trend.