Dual Momentum Strategy

3 Nov

This Pine Script™ strategy implements the "Dual Momentum" approach developed by Gary Antonacci, as presented in his book Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk (McGraw Hill Professional, 2014). Dual momentum investing combines relative momentum and absolute momentum to maximize returns while minimizing risk. Relative momentum involves selecting the asset with the highest recent performance between two options (a risky asset and a safe asset), while absolute momentum considers whether the chosen asset has a positive return over a specified lookback period.

In this strategy:

Risky Asset (SPY): Represents a stock index fund, typically more volatile but with higher potential returns.

Safe Asset (TLT): Represents a bond index fund, which generally has lower volatility and acts as a hedge during market downturns.

Monthly Momentum Calculation: The momentum for each asset is calculated based on its price change over the last 12 months. Only assets with a positive momentum (absolute momentum) are considered for investment.

Decision Rules:

Invest in the risky asset if its momentum is positive and greater than that of the safe asset.

If the risky asset’s momentum is negative or lower than the safe asset's, the strategy shifts the allocation to the safe asset.

Scientific Reference

Antonacci's work on dual momentum investing has shown the strategy's ability to outperform traditional buy-and-hold methods while reducing downside risk. This approach has been reviewed and discussed in both academic and investment publications, highlighting its strong risk-adjusted returns (Antonacci, 2014).

Reference: Antonacci, G. (2014). Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk. McGraw Hill Professional.