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Whale Trading

Dual Momentum Strategy: Viewing Inter-Asset Momentum and Absolute Momentum Together

In this article, we summarize the basic structure of the Dual Momentum Strategy.

Dual momentum looks at two main things simultaneously.

  1. Relative Momentum

    • Selecting the asset with better recent performance
    • Among several assets.

  2. Absolute Momentum

    • Checking if that asset itself is
    • In a better state than "Cash (or safe assets)".

In cryptocurrency, for example:

  • Between three things: BTC, ETH, Cash (Stablecoins like USDT/USDC)
  • Switching with simple rules,
  • While following the trend,
  • It can be made into a strategy that boldly observes (Cash) when the environment is bad.

This strategy is a type of Trend Following Strategy, but focuses more on "which asset to hold and when" than individual chart patterns.

1. What is "Momentum" in This Strategy?

Strictly speaking, momentum has several definitions, but in practice, it is usually used with the simple idea:

"Assets that have had good returns over a recent period are likely to continue showing good performance for a while"

For example:

  • If the return over the last 3 months is

    • BTC: +20%
    • ETH: +35%
    • Cash (Stable): 0%

  • Then, we consider ETH momentum to be the strongest during this period.

Adding one more thing here:

  • "ETH is strong, but is now a good time for the entire market?"
  • "Or is it just less weak in a weak market?"

Checking this is Absolute Momentum.

2. Summary of Basic Ideas of Dual Momentum

To summarize, Dual Momentum is:

  1. With Relative Momentum

    • Choose who is stronger between BTC and ETH,

  2. With Absolute Momentum

    • Check if that asset is better than cash (stable),
    • If it's okay, hold that asset,
    • If not, it's a strategy to return to Cash (Observation Mode).

In other words, if simplified very much:

  • Buy only the stronger of the two.
  • However, if both are bad, don't buy (Cash).

This is the rule.

In this article, as an example that is easy to use frequently in cryptocurrency, we will explain based on:

  • Asset Class: BTC, ETH, Cash (USDT)
  • Decision Cycle: Example: Once a month (Monthly Rebalancing)
  • Momentum Period: Example: Return over the last 3 months

(The figures are just examples, not fixed answers.)

3. Dual Momentum Strategy Structure: BTC/ETH/Cash Example

3-1. Basic Settings

  1. Asset Universe

    • A: BTC
    • B: ETH
    • C: Cash (Stablecoins like USDT/USDC)

  2. Decision Cycle

    • Once a month, decide the assets to hold for the next month based on the closing price at the end of the month.
    • If changed too often, fees, slippage, and fatigue increase, so here we take "monthly" as an example.

  3. Momentum Measurement Period

    • We will look based on the return over the last 3 months (about 90 days).
    • You can also do auxiliary checks with Moving Average or RSI, but the key is "simple return comparison".

3-2. Relative Momentum Phase (BTC vs ETH)

Based on the end of every month:

  1. Calculate BTC 3-month return
  2. Calculate ETH 3-month return

And:

  • The asset with the higher return of the two is viewed as the "superior asset" from the perspective of relative momentum.

Example:

  • BTC: +10%
  • ETH: +25%

→ This month, ETH is the asset with stronger relative momentum.

3-3. Absolute Momentum Phase (Asset vs Cash)

Now, compare the 3-month return of the asset selected in relative momentum (e.g., ETH) with Cash (0%).

  • If ETH 3-month return is greater than 0% → "Better than cash" → Hold ETH
  • If ETH 3-month return is 0% or less → "Worse than cash" → Hold Cash (USDT)

To summarize, at the end of every month:

  1. Find the asset with higher 3-month return between BTC/ETH,
  2. If that asset's 3-month return is positive → Hold 100% of that asset,
  3. If negative or 0 → Hold 100% Cash.

It becomes a very simple dual momentum rule.

In practice, rather than putting 100% into one asset, variations such as 70%/30% distributed weight are also possible.

4. Dual Momentum with Charts

The above rules are a summary from a formula perspective, and if organized from the perspective of looking at charts, it is as follows.

  1. Check Higher Timeframe Trend

  2. Relative Strength Over Recent Months

    • On BTC/ETH daily charts, you can intuitively check "which side showed stronger rise/weaker fall during the same period".
    • If viewed with Support/Resistance Basics structure, you can get the feeling more easily.

  3. Overall Market Environment (Absolute Momentum)

    • Even if ETH won in relative momentum,
    • If the last 3 months were a section like -5%, -10%, it might just be "the side that hurts less".
    • In such sections, from the perspective of Risk Management, it is natural to increase the cash proportion.

5. Common Variations in Dual Momentum Strategy

In practice, variations like the following appear frequently.

  1. Changing Momentum Period

    • A method of looking at a longer period such as 6 months or 12 months instead of 3 months.
    • The longer the period, short-term noise decreases, but signal reaction speed also slows down.

  2. Increasing Number of Assets

    • Adding a few top market cap alts besides BTC, ETH
    • And holding only the top 1~3 among them.

  3. Maintaining Partial Cash Proportion

    • Always keeping a certain percentage as cash (e.g., 20~30%),
    • And switching only the rest with dual momentum rules.

There is no correct answer that any setting is "best". The important thing is:

  • First decide the level of volatility and drawdown you can handle according to Risk Management,
  • And choose rules and periods within that.

6. Pros, Cons, and Precautions of Dual Momentum Strategy

6-1. Pros

  1. Rules are Relatively Simple

    • The intuitive structure of "only stronger assets, only when the market is good" makes it easy for beginners to understand the big picture.

  2. Complete Full-In, Full-Out is Possible

    • Thanks to the absolute momentum filter, the rule of exiting to cash when the entire market is weak enters naturally.

  3. Less Obsessed with Individual Patterns

    • Even without memorizing all detailed patterns of Patterns, you can focus more on "which asset to hold".

6-2. Cons and Precautions

  1. Parameter Sensitivity (Overfitting) Risk

    • 3 months vs 4 months vs 6 months, monthly vs weekly rebalancing, etc.
    • If you only fit to past data, it can become a strategy that is pretty only in backtests but hard to endure in reality.

  2. Characteristics of Rapidly Changing Crypto Market

    • As you can see by looking at ATR, cryptocurrency has very high volatility,
    • So it is difficult to avoid all bear markets with just simple dual momentum.

  3. Actual Execution Costs, Slippage, Taxes

    • Even on a spot basis, if fees and slippage accumulate, it can be less than the theoretical return.
    • In derivatives (futures), from the perspective of Risk Management, you must also consider funding fees and leverage risks together.

7. Dual Momentum Strategy Checklist

Before using the dual momentum rule yourself, it is good to check the questions below yourself.

  1. "What is the asset pool I will use?"

    • Will I use only BTC/ETH/Cash,
    • Or will I include 1~2 more top alts?

  2. "What are the momentum period and rebalancing cycle?"

    • Which of 3 months/6 months/12 months fits my Risk Management tendency?
    • How often will I change positions, such as monthly/quarterly?

  3. "How will I set the absolute momentum standard?"

    • Is it OK if the return is higher than cash (0%),
    • Or will I exit to cash?
    • Will I additionally use a trend filter like 60-Day MA Strategy together?

  4. "What are the maximum drawdown and acceptable volatility?"

    • Based on MDD and Max Loss, to what extent can I accept "the decline I might actually experience with this strategy"?

  5. "Can I actually continue to follow it?"

    • It is important whether you can maintain for more than 1~2 years the simple routine of checking rules and adjusting positions once at the end of the month.

To summarize the Dual Momentum Strategy:

A portfolio-type trend following strategy that selects relatively stronger assets among several, holds those assets only when the entire market is good, and avoids to cash when it is not.

It is.

If used together with these,

  • Not a strategy that stays in the market unconditionally,
  • But a strategy that picks and rides only strong assets in good environments

You will be able to create one choice called this with systematic rules.