2 trading strategies to understand all trading strategies

• Trend following strategies
• Mean reversion strategies
• Automated trading

Trend following strategies

The basic assumption of trend-following strategies is that most profit in the market is made when the market makes a big move and the profits made during these times are larger than when the market is stagnant or makes small moves. This assumption has implications for the typical performance. For example a trend following strategy loses more trades than it wins, because the market only makes big moves a small portion of the time. Typically most trend-following strategies only win 30% of the trades. However, when a big move occurs they will hit a homerun. Therefore these strategies often have a large profit factor. The profit factor is determined by dividing the average winning trade by the average losing trade. The profit factor and the percentage of trades the strategy wins are two key principles you will need to understand. Based on these two metrics we can determine whether a strategy is profitable or not.

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Mean reversion strategies

The basic assumption of mean reversion strategies is that the true price of a security is the mean. Another word for the mean is the average. Mean reversion strategies assume that when the price is above or below the mean, the price will revert back to the mean. These strategies are also called counter-trend trading strategies. These assumptions have implications for the typical performance. For example, mean reversion strategies typically win more trades than they lose, they usually win 70% of the trades. Because the price movements are small these strategies have small profit factors. The average win is sometimes equal to or smaller than the average loss. With a small profit factor you need to win more trades to be profitable. The biggest downside of these strategies is that they suffer a massive loss when the market makes a big move. I advise you to make a lot of trades and keep your positions for a short period. Moreover, be careful when sizing your positions. It is also possible to trade with a stoploss. When the trade moves against you because the market is experiencing a big move, your stoploss will prevent you from losing more money.

Automated trading

When you have created a profitable strategy, you must take all the trades. When you don't you will miss trades that could have made you a lot of money. This is why automated trading is the best there is. A trading bot can trade 24/7 and never misses a trade. Moreover, their decisions are not clouded by emotions. They will perfectly execute your profitable trading strategy, increasing your chances to make money. Read more about automated trading with the help of trading robots

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