VANCOUVER, BRITISH COLUMBIA--(Marketwired - Jun 4, 2013) - The Certified General Accountants Association of Canada (CGA-Canada) today released research that studied the momentum effect in Canadian capital markets and found that historical prices of securities are not useful for predicting future performance.
"Momentum trading can be a very high-risk strategy and is not suitable for novice investors," says Kamalesh Gosalia, CFA, CGA, PhD, Principal, Accounting and Assurance Standards at CGA-Canada and author of the report. "There is some evidence that the strategy could be successful for one-to-two weeks, but benefits dwindle progressively over a three-month period."
The report examined the daily adjusted closing prices of 180 securities over a 21-year period to identify possible relationships between historical security prices. If such a correlation was found, investors could use this information to anticipate a momentum effect. However, findings indicate that even though short-term parallels may exist, the technical analysis of historical prices cannot help investors forecast future performance in the long term.
Gosalia's analysis is one of the most recent studies exclusively focused on the Canadian capital markets and is consistent with studies done in other international capital markets.
"Understanding the momentum effect is just one part of the puzzle that investors need to consider," continues Gosalia. "The market is unpredictable and investment success is often based on an active investor doing independent research and a little good luck."
Five factors that are commonly seen as important for successful momentum trading include:
- Trend of the stock price
A stock with a recently-rising uptrend may suggest there is a momentum trend.
- Institutional ownership of the stock
Increasing confidence in a stock is seen as a good sign, and stocks with institutional ownership of between 5 to 25 per cent are viewed as likely to offer an opportunity.
- Earnings expectations
When momentum is present, good news that becomes public may only generate a short-term window to maximize profits before saturation has been reached.
- Price changes
Planning an exit strategy is one way to reduce the risk of a price reversal that may take the market by surprise.
- Level of risk
Setting a 'stop loss' threshold below the entry price may be helpful to mitigate risk if stock prices reverse suddenly and dramatically.
Founded in 1908, the Certified General Accountants Association of Canada serves 75,000 Certified General Accountants and students in Canada and nearly 100 countries. Respected accounting and financial management professionals, CGAs work in industry, finance, government and public practice. CGA-Canada establishes the designation's certification requirements and professional standards, offers professional development, conducts research and advocacy, and represents CGAs nationally and internationally.
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