57 % CAGR Return With a Tasty Momentum Investing Strategy

Before going into detail about this strategy I would like to make it clear that this has been tested on only 2 years of data, and for better results, it requires more testing. However, it does give an idea of the power of this strategy. 

As always, I have used Trendlyne tool to create and test this strategy.

I have only included those stocks having Pirotroski score more than 8 for the purpose.

What is my strategy?

Trendlyne Durability Score > 65 AND Trendlyne Momentum Score > 70 AND Market Capitalization in Cr < 50000 AND Market Capitalization in Cr > 3000

Trendlyne Momentum Score rates the momentum of stock at a scale of 100 and we have chosen only those stocks with a Momentum score is more than 70.

Some Strategy Facts

  • Period: 1 April 2019-16 July 2021
  • Stock Universe: Nifty 500
  • Benchmark: Nifty 500
  • Frequency: Quarterly
  • Return: 55.98% CAGR

See the performance in the graph given below.

From the graph, it is clear that it started outperforming the index only after April 2020. It is therefore of utmost importance to test its performance in the larger timeframe.

Portfolio Analysis

Here are some facts that came out in the portfolio analysis:

  • Max Period Returns:37.87 %
  • Min Period Returns: -16.23 %
  • Mean Period Returns:13.25 %
  • Average Stock Count per Period:12.00
  • Average Holding Period of a Stock:1.30
  • Winners/Losers :55 / 15
  • Max Drawdown: 16.23 %
  • Max Winner421.88 % (Adani Total Gas Ltd)
  • Max Loser: 38% (Coforge Limited)

Though the winners and losers ratio is very impressive, it has to be taken with the pinch of salt as during the testing period, the market was in 1 way upward journey and almost every stock doubled or tripled.

Period Analysis

  • Average Stock Count per Period:12.00
  • Max Period Return: 37.87 % | Jan 29, 2021
  • Mean Period Return: 13.25 %
  • Min Period Return: -16.23 % | Jan 31, 2020
  • Average Holding Period of a Stock: 1.30
  • Max Drawdown: 16.23 %

A good thing about this strategy is the ratio of negative returns/the number of quarters it gave positive returns: 0.66

What is the problem with this strategy?

Though it looks prima facie a very good strategy and the result is really impressive. But the problem lies in the selection of timeframe. A larger timeframe would have given many reliable results. A reliable strategy should cover a minimum of 2-3 bull and bear cycles and that does not come usually below 5 years.

That’s why I am skeptical about its performance. However, you can test it with different parameters, the different stock universe, add some more filters, and optimise it further. Nevertheless, it provides a good starting point for my readers.

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Vikash Kumar

An investor with more than 15 years of experience in the market. I m deeply interested in positional and momentum-based trading strategies and love learning strategies and backtesting.

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