Investment strategies

Unlocking The Power of Momentum Investing: Exploring Strategies and Insights in the Crypto Market

August 4, 2023
5 min

Introduction To Momentum Investing

Momentum investing is a trading strategy popularized by market participants that value long-term growth without having to monitor stock movement constantly.

This strategy can be rationalized by technical analysis and the age-old principle to “let your runners run”. Behavioral economics has taught us that market participants rarely act rationally, as their biases and reactions form, create, and sustain trends in asset prices. Momentum investors look to buy into these patterns as they form and sell them before they reverse. 

The most popular momentum investor, hedge fund manager Richard Driehaus, believed that more money could be made from “buying high and selling higher” than purchasing undervalued stocks and waiting for the market to appraise their value correctly. 

At its core, this strategy takes advantage of market volatility by taking short-term positions in securities where historical analysis predicts further upwards action. Investors then close these positions as soon as they notice signs of slowing down. 

Successful momentum investors are thus extremely selective with the equities they choose, knowledgeable in the underlying risk, and strategic with their entry timing. 

The crypto world is especially appealing to momentum investors given its risk-inclined and highly volatile nature. On top of this, cryptocurrencies are not subject to short-selling constraints in the same way that other securities are. This creates a perfect storm for experienced traders looking to capitalize on all movement and fluctuation. 

A recent study conducted by Tzouvanas et al. (2023) has found momentum trading to be a viable strategy providing substantial returns for both short-term and long-term momentum investing strategies.

Previous studies have mentioned the use of cryptocurrency as a means of diversification and hedging in a portfolio. This article will explore just that. 

Peccala’s algorithms are a prime example of crypto trading bots used to maximum efficiency

Understanding Crypto Trading Bots

It’s nothing like iRobot. Crypto Trading Bots are programmed algorithms designed to monitor the market 24/7. They can execute trades on behalf of their users based on predefined parameters. These facets make trading bots an invaluable tool for momentum traders looking to capitalize on crypto volatility. 

In the context of momentum investing,  you could technically program a trading bot to execute trades when a trend is formed and close positions when they are reversed. 

Peccala’s algorithms are a prime example of crypto trading bots used to maximum efficiency. Our trading engine analyzes every currency pair available on the Futures market. 

We utilize hundreds of trading bots with different trading principles that replicate how decisions are made on the trading floor of a major institution like the New York Stock Exchange. 

More specifically, our first layer engine calculates the probability of an existing trend being amplified. The analysis is based on our unique feature engineering process, which allows us to extract proprietary, meaningful signals from publicly available raw data, including the price, volume, and depth of the order book. These data points are then used to compute the probability of amplification. 

By trading crypto derivatives,  we can equally benefit from down and up market trends.

Key Factors and Best Practices For Successful Momentum Investing in Cryptocurrencies

Having specific tips and guidelines for individuals when it comes to momentum investing makes it easier to improve the expected return from your investments over the long run. 

Whether you’re a trading bot or a human trader, here are key reminders that will help you successfully momentum trade cryptocurrencies:

Setting Parameters

Having a set strategy with well-defined parameters is a prerequisite for finding success in the long-term as a trader. A clear strategy not only helps investors identify trends and make decisions on market entry or exit points, but they also provide a basis for performance evaluation. 

Backtesting and Analysis

Successful traders constantly analyze their closed positions to see what they could have done to improve. When clear parameters are set in place, investors can assess their approach’s efficacy and make the necessary adjustments based on the data provided by their strategy.

Selecting Suitable Cryptocurrencies

Choosing the right cryptocurrency to trade is as important as defining your trade parameters. Make sure you understand both the technical and fundamental indicators of the cryptocurrency you’re looking to trade. Learn the news and issues that directly impact momentum and start trends. 

Risk Management

Knowing the risk-reward ratio is crucial to succeed in any position. The ability to mitigate risks through stop-loss orders or dollar cost averaging is an invaluable tool that improves the expected value from each trade and sets you up for success in the long run. 

Leveraging Technical Indicators

On the topic of successful momentum trading, leveraging the right technical indicators should also be a top priority for your learning curriculum. 

More specifically, here are some of the more commonly

RSI: Relative Strength Index is arguably the most popular indicator amongst momentum traders. By measuring the number of days a token is up or down, the RSI is an indicator of an overbought or oversold asset - which many traders use as a forecast for a trend reversal. 

Stochastic Oscillator: Working coincidingly with the RSI, the stochastic oscillator is a momentum indicator that compares the token’s closing price, compared to a range of prices over a given period. 

Moving Average: The moving average smooths out pricing data over a number of days. This creates a defined price direction – often used for trend confirmation instead of prediction.   A moving average could be further subdivided into two categories: the simple moving average or the exponential moving average. 

MACD: The MACD shows the relationship between a token’s two moving averages. Used as an indicator for trend changes, MACD is calculated by subtracting the 26-period EMA from the 12-period EMA. 

Case Studies

Supporting research has looked back at the past 215 years of stock market trading and surmised that the ability to earn from momentum strategies would exist not just in US stocks but also in foreign markets, bonds, currencies, and commodities, as well. 

Let’s take the iShares MSCI USA Momentum Factor ETF, for example. This fund tracks the investment results of an index comprised of US large and mid-cap stocks chosen using momentum indicators. Since its inception, the fund would achieve an average annual return of 12.02%. For context, the average rate of return for the S&P 500 index measures just above 10%.

Risks and Limitations of Momentum Investing in Crypto

Given these above-average market returns, momentum investors also often take on above-average risks. Here are some of the risks and limitations of momentum investing in cryptocurrency.

Market Volatility

Volatility creates opportunity. Crypto traders often look to exploit volatility and short-term price fluctuations in cryptocurrency. On that note, volatility also leads to rapid trend reversals and incorrect market timing, which leads us to the next risk.. 

Time Intensive

Momentum investors in highly volatile markets have to monitor their positions hourly. Because they enter positions in the middle of a trend, investors need to be able to jump in and get out in a split second. 

Potential False Signals

Investors, no matter the level, base their decisions off of preconceived notions in the market. Born out of preconceived notions of the market and tested persistently, signals help traders make quick decisions on the fly. That said, these notions can sometimes be wrong - causing investors to make costly decisions. 

Market Sensitive

Momentum trading works best when you’re in a bull market. During these times, investors tend to heard a lot more towards similar securities. Momentum investing, after all, takes advantage of the investor’s FOMO (fear of missing out) to continue driving the price in one direction. During bear markets where trends are scarce, investor resources are more dispersed.

As trading bots are normalized, momentum investors will have to face the challenge of trading against a machine that monitors the market 24/7

Future Trends and Innovations in Crypto Momentum Investing

When a market catalyst enters the fray, a new trend forms. Here are some things to look out for in the trading markets moving forward:

Sophisticated Trading Bots

As trading bots are normalized, momentum investors will have to face the challenge of trading against a machine that monitors the market 24/7, executes a trade in a split-second, and leaves emotions out the door.

So what is a trader to do?

Embrace the change. Partner with more sophisticated trading bots and utilize them to adapt to market conditions faster. 

Integration of Artificial Intelligence and Machine Learning in Trend Prediction

Integrating artificial intelligence and machine learning into crypto trading platforms will likely take momentum investing to new heights. Technologies that can analyze vast amounts of data at breakneck speed to predict new trends forming at a more accurate rate than what any other human can do will be the norm. This will only enhance the effectiveness of momentum investing strategies as these machines provide you with invaluable insights in real time.  

Fundamental Market Developments

Fundamental market developments in the world of crypto momentum investing involve regulatory developments, blockchain technology advancements, and institutional investor sentiment. As the crypto market matures and evolves, it’s likely to face increased regulation, which could either pose new challenges or produce greater market stability and investor confidence. The approval of a crypto ETF, for example, would allow nearly everyone to gain exposure to the crypto markets without having to own the cryptocurrency directly. 


As we look to the future of momentum investing, we emphasize that, much like all trading and investment endeavors; the future could never be known with certainty. However, core indicators in the form of developmental forces such as regulations, DeFi growth, and artificial intelligence all lend insight into the future of this trading strategy. Peccala, with our advanced trading engine and proprietary algorithms, stands at the forefront of these developments as we look to offer investors the opportunity to get into the crypto markets at the ground level.