Breakout trading rests on one empirical claim: recent strength predicts near-term strength. If that claim were false, every method in this course would be an elaborate way of buying high and selling low. So we start where the evidence is strongest — not with a guru, but with the academic record, which is unusually good on exactly this question.
The stock evidence: winners keep winning (for a while)
In 1993, Narasimhan Jegadeesh and Sheridan Titman published what became one of the most-cited papers in finance, studying decades of U.S. stock data:
"This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3- to 12-month holding periods."
— Jegadeesh & Titman, "Returns to Buying Winners and Selling Losers," Journal of Finance 48(1), 1993 — free PDFThis is the momentum effect, and it wasn't new to practitioners — Robert Levy had published a "relative strength" version in the Journal of Finance back in 1967 (vol. 22, "Relative Strength as a Criterion for Investment Selection"), and traders had acted on it since Livermore. What 1993 added was rigor: the effect survived adjustments for risk, and it has since been found in markets around the world.
The everything evidence: trend across assets and centuries
Two later studies widened the lens. Moskowitz, Ooi & Pedersen (2012) documented "time series momentum" — an instrument's own past 12-month return predicting its next move — across 58 futures markets: equity indexes, currencies, commodities, and bonds. This is the academic cousin of exactly what Donchian and the Turtles traded (Modules 3–4). Then Hurst, Ooi & Pedersen (2017) pushed the test back to 1880 with "A Century of Evidence on Trend-Following Investing", finding the strategy would have delivered positive average returns in every decade of the sample, with low correlation to stocks and bonds.
Why would such a simple thing persist? The usual explanations are behavioral: investors underreact to news at first (trends start), then herd into what's already moved (trends run), then overshoot (trends end badly — hold that thought for Module 8). Nobody has settled which explanation is right; the pattern is far better established than its cause.
What the evidence does not promise
Read the fine print before it reads you. The academic momentum premium comes from diversified portfolios of hundreds of positions, rebalanced systematically, measured before real-world trading costs — not from one trader buying three breakouts. Momentum profits partially reverse after a year (Jegadeesh & Titman documented that in the same paper). And the effect arrives with long stretches of underperformance and occasional violent reversals. Asness and colleagues' "Fact, Fiction and Momentum Investing" (2014) is the honest tour: momentum is real, robust, and implementable — and still hard to live with.
So the evidence buys you exactly one thing: permission to take the idea seriously. The rest of this course is how six generations of traders turned that statistical tendency into rules a human can actually follow.
Assignment
Skim just the introduction of the Century of Evidence paper (it's readable). Then write two sentences in your journal: one stating what the evidence supports, one stating what it doesn't. If you can't write the second sentence, reread the fine-print section above — it's the one that protects your account.