# Momentum Factor > The momentum factor buys recent winners and sells recent losers. Learn how it is built, the evidence across markets, momentum crashes and how to manage them. Source: https://learn.tradelabsai.com/research/momentum-factor/ Track: Research and Backtesting · Level: Advanced · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Momentum Factor", https://learn.tradelabsai.com/research/momentum-factor/ The momentum factor captures the tendency of assets that have performed well over the past several months to keep outperforming, and of poor performers to keep underperforming. Momentum is one of the most robust patterns in finance, found in stocks, bonds, currencies and commodities across many countries and over two centuries of data. It also has a dark side: rare but severe crashes. This lesson covers momentum as a systematic factor; the trading style is covered in [Momentum Trading](https://learn.tradelabsai.com/strategies/momentum-trading/). ## Two kinds of momentum | Type | Compares | Lesson | |---|---|---| | Cross sectional momentum | Each asset against others: buy relative winners, sell relative losers | This lesson | | Time series momentum | Each asset against its own past: long if it has risen, short if it has fallen | [Trend Following](https://learn.tradelabsai.com/strategies/trend-following/) | ## Building a momentum factor The standard academic construction (often called UMD, "up minus down", or WML, "winners minus losers"): 1. **Measure each stock's return** over the past 12 months, skipping the most recent month (to avoid short term reversal). See [Short and Long-Term Reversal](https://learn.tradelabsai.com/research/short-and-long-term-reversal/). 2. **Rank stocks** by this return. 3. **Buy the top group** (for example, the top 30%) and **short the bottom group.** 4. **Rebalance monthly.** ## The evidence - **Jegadeesh and Titman (1993)** found that buying past 3 to 12 month winners and selling losers earned about 1% a month in US stocks from 1965 to 1989. - **Rouwenhorst (1998)** found momentum in 12 European markets. - **Asness, Moskowitz and Pedersen (2013)** documented momentum across asset classes. - **Geczy and Samonov (2016)** found momentum in US stock data going back to 1801. ## Why might momentum work? | Explanation | Idea | |---|---| | Underreaction | Investors adjust slowly to new information, so prices drift. See [Earnings Reactions and Post-Earnings Drift](https://learn.tradelabsai.com/fundamentals/post-earnings-drift/) | | Herding and feedback | Rising prices attract more buyers | | Disposition effect | Investors sell winners too early and hold losers, slowing price adjustment. See [Disposition Effect](https://learn.tradelabsai.com/psychology/disposition-effect/) | | Risk | Momentum may compensate for crash risk | ## Momentum crashes **Example: The 2009 momentum crash** After the 2008 crisis, the momentum portfolio was long defensive stocks that had held up and short battered financial and cyclical stocks. When markets rebounded sharply from March 2009, the past losers surged far more than the past winners. Over a few months, the US momentum factor lost roughly 70% to 80% by some measures, one of its worst periods on record. Kent Daniel and Tobias Moskowitz (2016) showed that momentum crashes tend to happen in "panic states": after market declines, when volatility is high and markets rebound. ## Managing momentum risk | Technique | How it helps | |---|---| | Volatility scaling | Reduce exposure when momentum volatility is high; research by Barroso and Santa Clara (2015) found this greatly reduced crashes | | Combine with value | Value and momentum are negatively correlated. See [Combining Signals](https://learn.tradelabsai.com/research/combining-signals/) | | Industry neutral momentum | Removes large sector bets | | Avoid concentrated shorts in distressed stocks | Reduces squeeze risk | | Residual momentum | Uses returns after removing factor exposures | ## Costs and turnover Momentum has high turnover, often 200% to 400% a year for monthly rebalanced portfolios, so trading costs take a meaningful share of returns, especially in small caps. Buffers and slower rebalancing help. See [Signal Turnover, Breadth and Neutralization](https://learn.tradelabsai.com/research/signal-turnover/). ## Frequently asked questions ### What is the momentum factor? A systematic strategy that buys assets with strong recent performance, typically over 12 months excluding the last month, and sells those with weak performance. ### Why skip the most recent month in momentum? Because returns over the most recent month tend to reverse in the short term, which would weaken the momentum signal. ### What causes momentum crashes? Sharp market rebounds after declines, when beaten down past losers rally much more than past winners, as in 2009. Next, learn about profitable, stable companies in [Quality and Profitability Factors](https://learn.tradelabsai.com/research/quality-factor/). ## Continue learning - Next lesson: [Quality and Profitability Factors](https://learn.tradelabsai.com/research/quality-factor/) - Previous lesson: [Value Factor](https://learn.tradelabsai.com/research/value-factor/) - Related: [Value Factor](https://learn.tradelabsai.com/research/value-factor/): The value factor buys cheap stocks and avoids expensive ones using ratios like book to market. Learn the evidence, the long drawdown and how to build it. - Related: [Momentum Trading](https://learn.tradelabsai.com/strategies/momentum-trading/): Momentum trading buys assets that are rising fastest and sells those falling fastest. Learn the research, intraday and multi month methods and momentum crashes. - Related: [Trend Following](https://learn.tradelabsai.com/strategies/trend-following/): Trend following buys markets that are rising and sells those that are falling. Learn the rules, the evidence, typical results and why patience pays. - Related: [Short and Long-Term Reversal](https://learn.tradelabsai.com/research/short-and-long-term-reversal/): Reversal effects describe recent losers beating recent winners over very short and very long horizons. Learn the evidence, the causes and the link to momentum. - Related: [Factor Timing, Crowding and Crashes](https://learn.tradelabsai.com/research/factor-crowding/): Factor crowding happens when too much capital chases the same factor. Learn how crowding affects returns and crash risk, how to measure it and how to cope.