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The Momentum Crash Filterthe one thing that has reliably broken this family

Evidence: StrongProfessionalMomentum · Risk management

Momentum's failures are not spread evenly. They arrive as crashes — short, violent periods where the losers rally hardest and a momentum book loses more in weeks than it made in years.

Daniel and Moskowitz documented both the pattern and its conditions: momentum crashes follow market declines and occur when volatility is high, and the short leg is where the damage happens. That combination is observable in advance, which makes it one of the few genuinely actionable risk findings available to a retail trader.

The evidence is for return persistence — instruments that have gone up tend to keep going up for a while. Every page here is one way of measuring that, and the measurement is a choice while the effect is the finding.

Category
Momentum · Risk management
Timeframe
Monthly assessment · applies to any momentum book
Suitable pairs
Any momentum strategy in this library
Session
Month-end close for the state, weekly for the volatility
Indicators / tools
Trailing market return · realised volatility of the momentum book itself

Valid setup

MO-09 · THE MOMENTUM CRASH FILTER — THE BOOK'S OWN EQUITY both conditions present at bar 44 · the book is halved before most of the damage, and the short leg goes first OVERLAY 97.8 101.2 104.7 108.1 111.5 115.0 118.4 NEITHER CONDITION PRESENT — full size MARKET DECLINE + HIGH VOLATILITY — HALVED, SHORT LEG FIRST CONDITIONS CLEARING — restored in steps peak start trough with the filter on 1 2 3 116.0 100.0 104.0 realised volatility of the momentum book — one of the two conditions ① Both conditions read at the month end — filter fires ② Short leg cut first: that is where the crash lands ③ Without the filter this trough is considerably lower ④ Restored only after a clear month ⑤ It reduces returns when no crash follows. Often ⑥ An overlay, not a trade — add it to any momentum page

Exact rules

Entry

  • Define the two conditions before you need them: a trailing market decline over the past one to two years, and realised volatility above its own recent norm.
  • When both hold, the crash environment is live. Halve the momentum book.
  • Cut the short leg first. That is where the research locates the damage — the losers rebound hardest when the market turns.
  • Restore in steps only after both conditions have cleared for a full month.

Stop loss

  • Portfolio level, as in the risk book — the filter is a state rule, not a price level.
  • Keep a hard drawdown cut underneath it. The filter reduces exposure to the known failure mode, not to every failure mode.
  • Total risk at full size 2%–4%, halved when the filter fires.

Take profit / exit

  • There is nothing to take profit on — this is an overlay, not a trade.
  • Record every time the filter fired and what followed. If it fires often and nothing happens, your volatility threshold is too tight.
  • Scaling exposure by the book's own volatility, as Daniel and Moskowitz also study, is a smoother version of the same idea and worth testing as an alternative to the on/off switch.

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Trading carries risk and most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade. The chart is an illustration of the rules on constructed candles — it is not a record of a trade and not a backtest.