Momentum: Exploiting Human Emotions

Momentum investing is all about avoiding extreme losses and profiting off the fear and greed of others

John Gabriel 26 October, 2012 | 6:00AM

Why does market momentum exist, and how can we exploit it?

While this is a very short and simple question, it has a relatively long and complex answer. In a nutshell, it ultimately boils down to investor psychology.

History has shown that investors are more apt to sell "winning" investments as they appreciate but hold on to "losing" investments as they fall. There is a sense of victory that comes with selling the "winners," and many investors like to think about what they will spend their profits on (for example, a new car, dream vacation, and so on). On the flip side, investors incur a great deal of pain with respect to their losing investments--so much so that the flight response is triggered and many investors even avoid looking at their account statements. Human emotions--namely greed and fear--take over.

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About Author

John Gabriel  is an ETF strategist with Morningstar, responsible for Canadian ETF research.

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