The Filozof Advanced Equity Momentum (FAEM) strategy is based on one of the strongest, best-documented, and most repeatable market anomalies — the momentum anomaly. However, FAEM goes a step further: it intensifies momentum, filters weak signals, reduces false breakouts, and minimizes exposure to assets with weak trend quality and high volatility.
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Momentum from two exponential moving averages — a more "alive" signal
FAEM calculates momentum as the ratio between a faster exponential moving average (approx. 6 months) and a slower EMA (approx. 12 months).
Why this works?
- EMA reacts faster than SMA, catching trend changes earlier.
- The 6M/12M relation separates true trends from noise.
- Momentum signals are cleaner, more stable, and more adaptive than classic momentum.
Filter: inverse volatility
Even the best momentum can be destroyed by highly volatile stocks and false breakouts.
- stocks with "explosive" volatility,
- pump&dump stocks,
- stocks with artificial breakouts.
FAEM applies a penalty for high volatility — lower volatility stocks get higher weight.
Why this works:
- Reduces risky "rocket-to-ground" stocks.
- Increases share of stable trends.
- Smooths the capital curve.
- Builds a more “fund-style” investing approach.
Effect: higher returns with lower risk.
Filter: minimum momentum threshold
FAEM invests only when momentum exceeds a specified threshold.
- Momentum > 30
- Momentum greater than the market average.
- Momentum greater than the sector median.
Why it works?
- Eliminates sideways-trending stocks.
- Reduces false breakouts.
- Focuses on stocks with real buying momentum.
Dynamic stock weighting – FAEM advantage
FAEM does not use equal-weight — weights depend on inverse volatility.
Why it works?
- Stable stocks get a higher weight.
- The portfolio tilts towards winners.
- Reduces risk thanks to low-volatility weighting.
This is a mathematical optimization of momentum.
Quarterly rebalancing — not too often, not too rarely
Momentum works best when signals are updated periodically, but not too often, to avoid noise and costs.
- Reduces the impact of market noise.
- Keeps winners longer.
- Cuts losers faster, but without impulses.
Why FAEM works in PRACTICE
Increases the winning side of the outcome distribution
- In momentum, usually 20–30% of stocks generate 70–90% of portfolio profits.
- FAEM, thanks to filters and weights, maximizes the share of these 20–30% of winners.
- Minimizes the impact of stocks that drag down performance.
Eliminates junk momentum
- Regular momentum picks up pump & dump, high-risk microcaps, and stocks with unrealistic growth.
- FAEM removes them using volatility filters.
Works in different market conditions
- Buys trends during bull markets,
- Moves to cash or bonds during bear markets,
- Uses dynamic filters, so it suffers less during reversals.
Why is the practical effect so strong? Thanks to this, FAEM has a higher Sharpe and Sortino ratio than regular momentum.
Why FAEM works thanks to the momentum anomaly?
FAEM works, because:
- It leverages the fundamentals of momentum.
- Removes weak, random, one-off trends.
- Focuses exposure on high-quality trends.
- The volatility filter removes toxic moves.
- Weights are proportional to trend stability.
- Acts like momentum, but with an internal risk control mechanism.
Summary — why FAEM works
- It is based on the strongest market anomaly — momentum,
- It uses the “healthy” part and eliminates weak points,
- Adds quality and signal stability filters,
- Properly assigns weights and controls volatility risk.
W efekcie: dostajesz strategię, która jest bardziej stabilna, bardziej odporna na odwrócenia i historycznie bardziej dochodowa niż klasyczne momentum.
WHY DOES THE MOMENTUM ANOMALY WORK?
