The basis of the investment decisions of Penta Trading is a ranking list. For this, all stocks of any universe (e.g. an index) are examined with respect to their momentum. Aspects of momentum theory were already studied in the 60s by Robert Levy - if you like, you can read about it here. Roughly simplified - and in analogy to the physical principle- it is about the momentum of a stock. What Levy found is that stocks with currently high momentum tended to have higher future returns than stocks with correspondingly lower momentum. The difference was almost 14% per year for his period of observation. He was thus one of the first to provide statistically robust data for this principle. From this it is already clear that the momentum of a share must always be seen in relation to that of other shares.

​​

Private investors can also implement this principle by means of an ETF. For example, the Xtrackers MSCI World Momentum ETF has gained almost 200% at its peak since its launch in 2014. A pure MSCI World comes to a maximum of 150% in the same period. You could say that we take this principle to the extreme and try to get the maximum out of it, because the Momentum ETF still invests in more than 300 stocks, we invest in just 5. So how are these determined?

​

We have developed a multifactorial algorithm that determines a stock ranking. The ranking is determined at the beginning of each month and the top 5 stocks result in the portfolio for the new month. During this time the stocks are monitored live, probably shifting in the rank. If a stock slips from rank 1 to rank 6, this does not immediately lead to a sell order. In order to leave some room for the daily fluctuations, shares are only sold when they slip below a pre-defined threshold. This creates a grace period until the next rotation at the beginning of the month. Sounds illogical at first, but in practice it ensures that stocks are not immediately stopped out in the event of a rather short-term weak phase, resulting in a "buy high, sell low" trading pattern.