Momentum or directional trading

Momentum trading is trading when the instrument is trending up or down or, in other words, continuation in the trend as like historical winners are expected to be winners and historical losers are expected to lose. You bet on the direction of the instrument and you aim for buying at a low price and selling at a high price. I will not cover the pros and cons and what the different types of momentum trading strategies are. It is left to the trader to devise any idea. I will cover how to implement momentum trading rules and backtest using historical data in R. Stock return depends on various factors, and later in this chapter, I will show you how to use the multifactor model which explains stock return.

Let me start with simple technical indicators.

Technical indicators are implemented in the quantmod package so I will be using quantmod for this:

> library('quantmod') 
>getSymbols("^DJI",src="yahoo") 
[1] "DJI" 
> head(DJI) 

We have...