Momentum vs. Contrarian Investing

Momentum investing is a strategy based on the premise that an asset's recent price trend is more likely to continue than to reverse in the near term, leading momentum investors to buy assets that have recently risen and sell or avoid ones that have recently fallen, betting that the existing trend persists. Contrarian investing takes the opposite premise, betting that a trend has become overextended — driven by excessive crowd optimism or pessimism rather than genuine underlying value — and is more likely to reverse than continue, leading contrarian investors to buy into weakness and sell into strength.

Neither philosophy is reliably correct in every market environment: momentum investing can work well during a sustained, genuine trend but perform poorly when a trend reverses sharply, while contrarian investing can work well at genuine market extremes but perform poorly by fighting a trend that continues for far longer than expected. Many market participants use elements of both, rather than adhering strictly to one philosophy across every market condition, and distinguishing a genuine trend reversal from a temporary pullback within a continuing trend is itself one of the hardest practical judgment calls either approach requires.