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An attractive characteristic of momentum strategies is that they generate a distribution of trading returns that is positively skewed. This can mean fewer winning than losing trades, but still positive expected returns. Richard Martin and David Zou derive explicit formulas for the skewness of the trading returns, for certain simple types of model, and show that it has a characteristic term structure
In a very interesting paper, Potters & Bouchaud (2005) point out that the question: “what fraction of your trades are winning?”, often asked of fund managers, is largely irrelevant to fund performance. For trend-following strategies, it is well known that small trading losses are common, but occasional big gains are produced when the strategy levers itself into a trend. The longevity of trend
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