Non-linear momentum strategies

Trading strategies that follow trends, or market momentum, result in positively skewed distribution of trading returns. Strategies that are linear in the factors driving the momentum have been studied before, but Richard Martin and Ali Bana extend this to the non-linear case, and find that smoothly changing direction with momentum is preferable to simple binary trading rules

Trend-following or momentum strategies have the attractive property of generating trading returns with a positively skewed statistical distribution. Consequently, they tend to hold on to their profits and are unlikely to have severe ‘drawdowns’. They are very scalable and are employed in most asset classes – most traditionally in futures, but also in over-the-counter markets – and by both buy- and sell-side practitioners. Studies on the subject have generally been empirical (for a good overview