There is no good direction to trade, short or long; there is only the money-making way to trade.
—Jesse Livermore, quoted in Reminiscences of a Stock Operator1
The momentum-based short strategy offered in this chapter employs the same logic as the long strategy presented in Chapter 10, but turned on its head. If relative momentum (RM) leaders are held as the trend advances, then RM laggards are shorted when the trend declines. As in the long strategies, direction of momentum (DOM) is our guide to the direction of the trend. Figure 11.1 shows cumulative results of shorts in RM laggards as the DOM trends lower.
There are two imperatives to any successful momentum-based strategy, ...