Momentum trading: buying strength (India)

🎯 In 30 seconds: Momentum trading means buying shares that have risen more than others over the past 3 to 12 months and holding them while they stay strong. Research from IIM Ahmedabad found a large momentum effect in Indian shares from 1994 to 2014, and NSE Indices runs a rules-based Nifty200 Momentum 30 index built on 6-month and 12-month returns adjusted for volatility. The catches are real: momentum suffers sudden crashes when beaten-down stocks rebound, frequent rebalancing costs 0.1% STT on every buy and sell, and strong small caps can run into price bands and surveillance measures just when you want out.

The batting order

A cricket captain does not pick the batting order by who scored the most runs in a career. He looks at recent form: who has been scoring over the last few series. Form is not guaranteed to last, and every captain has seen an in-form player get out first ball. But on average, players in form keep scoring for a while, and captains who ignore form lose more matches.

Momentum is the market version of picking on form. It does not ask why a share has risen. It asks only whether it has been among the strongest, and bets that the strength continues for a few more months.

What momentum means

There are two kinds, and they are easy to mix up:

Relative (cross-sectional) momentum. Rank a list of shares by their past return and buy the top of the list. A share can be a "winner" even in a falling market if it fell less than the others. This chapter is mostly about this kind.
Absolute (time-series) momentum. Is this one market or share above where it was a year ago? If yes, hold; if no, step aside. That is trend following.

Most momentum methods skip the most recent month when measuring the past return. Research has found that very short-term moves (about a month) tend to partly reverse, while 3 to 12 month moves tend to continue. Skipping the last month avoids buying a share right after a short spike. See Mean reversion for the short-term side.

Measuring strength fairly

Raw return favours the wildest shares. A stock that swings 5% a day will sometimes top the list just by luck. So most serious momentum methods divide the return by the stock's volatility, which ranks shares by return per unit of risk.

Here is a simplified version of the idea on five hypothetical shares. For each, divide the 6-month return and the 12-month return by the annualised volatility of daily returns, then average the two ratios.

Share (hypothetical)	6-month return	12-month return	Volatility	6m ratio	12m ratio	Average	Rank
Sharma Foods	+30%	+45%	30%	1.00	1.50	1.25	1
Konkan Cements	+40%	+80%	50%	0.80	1.60	1.20	2
Deccan Bank	+12%	+25%	20%	0.60	1.25	0.93	3
Malabar Pharma	+5%	+30%	25%	0.20	1.20	0.70	4
Indus Power	-10%	+5%	35%	-0.29	0.14	-0.07	5

By raw 12-month return, Konkan Cements (+80%) would be first. Adjusted for its much bigger swings, Sharma Foods ranks higher. Malabar Pharma looks fine on 12 months but almost all of that came in the first half of the year; its recent 6 months are weak, so it drops down.

Hypothetical shares, simplified scoring. A momentum trader would hold the top names and replace any that fall down the list at the next review.

How NSE's momentum index does it

You do not have to invent a method from scratch. NSE Indices publishes the rules of the Nifty200 Momentum 30 index, which is a useful worked example of a disciplined momentum strategy. From NSE Indices' factsheet and launch press release:

Universe: the shares in the Nifty 200, so large and mid caps only.
Score: a "normalised momentum score" built from each share's 6-month and 12-month price returns, adjusted for the volatility of its daily returns.
Selection: the 30 shares with the highest scores, with a buffer around the cut-off to reduce needless churn.
Weights: free-float market cap multiplied by the score, capped at the lower of 5% or 5 times the share's plain market-cap weight.
Review: rebalanced twice a year, in June and December.
Dates: launched on 25 August 2020, with a base date of 1 April 2005.

That last point matters when you read its history. NSE Indices' launch white paper (data to August 2020) showed the index returning 18.6% a year since 2005 against 12.7% for the Nifty 200, with slightly higher volatility (23.4% against 22.3% a year). But the index did not exist until August 2020. Its first 15 years are a back-calculation: what the rules would have picked, without real trading costs or the risk that the rules were designed with hindsight. Live performance since launch is the only out-of-sample part, and it is in the current factsheet on niftyindices.com. NSE Indices publishes other momentum and factor indices too; their methodology documents are worth reading for the same reason.

Copy the discipline, not the picks

The useful lessons from the index rules are the boring ones: a fixed universe of liquid shares, a score adjusted for risk, a buffer to avoid churning, a weight cap so no single name dominates, and a calendar for reviews. A beginner who follows those five rules with a list of 10 shares is doing something testable. A beginner who buys whatever rose most this week is not.

What the Indian evidence shows

Momentum is one of the most studied patterns in finance, and India is no exception.

IIM Ahmedabad. Agarwalla, Jacob and Varma built Indian versions of the standard research factors from CMIE Prowess data, excluding illiquid shares and correcting for companies that disappeared. From January 1994 to December 2014, the momentum factor (a portfolio long recent winners and short recent losers, rebalanced monthly) returned an average of 21.9% a year. The authors note that this is before trading costs, which are higher for momentum than for the other factors because the portfolio is rebuilt every month. The series is kept in a public data library.
Global research. Similar patterns have been found in the US going back to the 1920s and in many other markets. Very short-term returns tend to reverse, 3 to 12 month returns tend to continue, and multi-year returns tend to partly reverse again.

Two honest limits. First, the academic factor is long winners and short losers. You cannot easily hold short positions in Indian shares overnight in the cash market, so a retail trader can capture only the long half. Second, a paper return is not your return: it ignores your STT, stamp duty, brokerage, DP charges, spreads and tax.

Why momentum might exist

Nobody fully agrees. The main explanations:

Underreaction. Investors adjust slowly to good or bad news, such as a strong set of results, so prices drift in the direction of the news for months.
Herding and overreaction later. Rising prices attract buyers, which pushes prices further. Over several years, part of that move tends to reverse.
Risk. Some argue momentum is pay for carrying crash risk, described next.

Momentum crashes

Momentum does well for long stretches, then can give back years of gains in a few months. Daniel and Moskowitz studied US shares from 1927 to 2013 and found the worst momentum losses cluster after a big market fall, when volatility is high and the market suddenly rebounds. In those moments the most beaten-down shares bounce hardest, and the strategy is holding the wrong ones. Their two worst episodes were mid-1932 and March to May 2009.

The lesson for India: be most careful with momentum right after a sharp market fall, when the "winners" list is full of defensive shares that merely fell less. Cutting position size when the market is volatile after a big decline is a common defence.

Indian markets add three hazards of their own, mostly in smaller shares:

Price bands. Shares outside the F&O segment can only move 2%, 5%, 10% or 20% in a day. A momentum favourite can hit its lower band day after day with only sellers. Your stop-loss cannot fill.
Surveillance measures. When a share rises fast, the exchanges can put it under additional surveillance (ASM or GSM frameworks), which can mean higher margins, a move to trade-for-trade settlement or tighter bands. See The rules every Indian trader runs into.
Tips and pumps. Shares that "everyone is talking about" on Telegram are often momentum stocks being sold to latecomers. See Scams and red flags.

Momentum is not "buy what went up today"

The evidence is about returns over 3 to 12 months, measured across a broad list of liquid shares, with regular rebalancing. It is not about chasing a share that jumped 15% this morning on a rumour. That is a different, much riskier bet.

The cost of rebalancing

Momentum works by replacing shares that fall down the list. Each replacement is a delivery sale and a delivery purchase, and STT is 0.1% on each (as of October 2026). How often you review matters a lot. Hypothetical: a ₹5,00,000 portfolio of 10 equal shares, with a ₹20 brokerage per order and a ₹17.70 DP charge per sale.

	Monthly review, replace 3 shares	Half-yearly review, replace 4 shares
Value sold and bought per review	₹1,50,000 each way	₹2,00,000 each way
STT per review (0.1% each side)	₹300	₹400
All charges per review (STT, stamp duty, exchange, GST, brokerage, DP)	About ₹528	About ₹705
Reviews a year	12	2
Charges a year	About ₹6,340 (1.27%)	About ₹1,410 (0.28%)

Hypothetical. Monthly reviews cost more than four times as much a year, before spreads and tax. Every short-term gain realised at a review is also taxed as a short-term capital gain.

A 1.27% yearly drag is a large share of any edge a retail trader can hope for. This is one reason index-based momentum, reviewed twice a year, is a sensible benchmark: if your own momentum picks cannot beat it after costs, there is little reason to keep picking.

Managing momentum risk

Stick to liquid shares. A universe like the Nifty 200 avoids most price-band and surveillance traps.
Spread it out. Hold 10 or more names with a cap per share, and watch sector concentration: momentum lists often cluster in one or two hot sectors. See Diversification and correlation.
Review on a calendar. Monthly or quarterly, not whenever you feel nervous.
Keep a hard stop per share for news shocks, sized so one gap cannot hurt the whole account.
Cut size after a crash, when momentum reversals have historically been worst.

Try it

Pick 15 large shares from a broad index list on niftyindices.com. In a spreadsheet, record each share's closing price today, one month ago, seven months ago and thirteen months ago (NSE's historical data pages or your broker's chart will give these). Work out each share's return from 13 months ago to 1 month ago and from 7 months ago to 1 month ago, skipping the latest month. Estimate volatility roughly from the share's 52-week high and low, or properly from daily closes if you can. Rank by the average of return divided by volatility. Write down your top five and check the list again in three months against the Nifty 200. Do not buy anything; the point is to practise the method.

Check yourself

Why do momentum methods divide the return by volatility? Answer: Raw return favours the wildest shares, which often top the list by luck. Dividing by volatility ranks shares by return per unit of risk.
What does the Nifty200 Momentum 30 use to score shares, and how often is it rebalanced? Answer: A normalised momentum score from 6-month and 12-month price returns adjusted for daily return volatility. It is rebalanced twice a year, in June and December.
The index's history goes back to 2005. Why should you treat the years before August 2020 with care? Answer: The index launched on 25 August 2020. Earlier values are back-calculated from the rules, not results of real trading.
What average yearly return did the IIM Ahmedabad study find for the Indian momentum factor, and why can a retail trader not simply earn it? Answer: 21.9% a year from 1994 to 2014. It is long winners and short losers, rebalanced monthly, before trading costs; a retail trader cannot easily hold overnight shorts in the cash market and pays STT and other charges on every switch.
When have momentum crashes tended to happen? Answer: After sharp market falls, when volatility is high and beaten-down shares suddenly rebound.

🚀 Momentum trading: buying strength