A portfolio based on momentum/price trend investing would have shown a capital gain of 56 per cent over the past three years, over which period the FTSE 100 Index only increased by 12.4 per cent.

Momentum investing is the controversial strategy of investing in a share simply because it has already gone up.

Digital Look says that variations of momentum trading have become very popular among hedge funds, many of which base their sophisticated trading techniques around variations on the momentum trading principle.
 
However, momentum trading, which attracts more buying to follow a rising price, has been criticised as helping to create bubbles within certain asset classes such as ‘dot-com’ shares in the 1990s, and more recently oil and other commodities.
 
Andy Yates, director of Digital Look, says, ‘Despite the mayhem created in the stock market by the credit crunch, the “momentum investing” strategy has just kept motoring on. However, investors should be aware that the strategy has begun to lose its way a little over the past six months.
 
‘Whether momentum investing is a wise strategy or not is a point that is going to be argued over for years. Some investors, like George Soros, have made huge profits using variations of this strategy. They claim that it capitalises on other investors’ behavioural shortcomings, such as a herd tendency among investors to be overly bullish or overly bearish, which causes share prices to overshoot or undershoot. Momentum traders are often accused of pushing a trend until it ends in a dramatic reversal.’
 
He adds that momentum trading would have picked many of the star performers of the past three years such as Tullow Oil, up 346 per cent, and Vedanta Resources, up 283 per cent.