Enhancing Momentum Trading with Macroeconomic Indicators- A Strategic Approach

Abstract

Traditional momentum trading strategies capitalize on existing market trends but often overlook broader macroeconomic contexts, potentially limiting their effectiveness during periods of economic fluctuation. This paper introduces an enhanced momentum trading strategy that incorporates key economic indicators—GDP, inflation, unemployment rates, and interest rates—to provide a more robust framework capable of adapting to changing economic conditions. By integrating these macroeconomic factors, the strategy aims to improve predictive accuracy and performance stability. Using data from the S&P 600 SmallCap Index, we modified the conventional momentum calculation to include weighted contributions from these indicators, creating a comprehensive 'new momentum' score. Preliminary back testing, comparing this enhanced strategy against traditional methods, shows promising improvements in risk-adjusted returns. This paper not only details the methodology and results of integrating economic indicators into momentum trading but also discusses the implications for risk management and potential areas for future research.