What are the main categories of systematic trading strategies (e.g. momentum, mean reversion), as might be considered by an index or fund-of-fund analyst?

Are there any common sub-strategies?

  • 1
    $\begingroup$ close? meta.quant.stackexchange.com/questions/11/… $\endgroup$ – Michael Pryor Feb 8 '11 at 20:01
  • $\begingroup$ Saw it coming ;)... At least I know what kind of thing not to ask now. $\endgroup$ – Terco Feb 8 '11 at 20:11
  • $\begingroup$ @Michael I don't know what to do with this question: it seems so wrong on so many levels based on being (a) too introductory and (b) asking about specific strategy development, but on the other hand it does seem like there should be a correct answer (i.e. there are families of quantitative trading strategies: just ask any fund-of-fund's analyst for a set of definitions, and there will be general agreement). @Terco: Please try to rephrase your question to be more general and objective, or else I might edit it for you. :) $\endgroup$ – Shane Feb 8 '11 at 20:11
  • $\begingroup$ @Shane Please be my guest, you can probably phrase it better than me. Second try: "What are the subcategories for 'Trend Following' and 'Mean Reversion' strategies?. I know only of moving average crossovers for the former and pair trading for the latter. " $\endgroup$ – Terco Feb 8 '11 at 20:28
  • $\begingroup$ If you have questions about specific sub-areas, ask that question separately. I edited your question down to a pretty basic level. Chris has already supplied a good answer. As per @Michael's link above: specific questions about strategies can be considered off-topic unless they can be asked in a general way. $\endgroup$ – Shane Feb 8 '11 at 20:38

There are other strategy types not covered by mean-reversion/trend following:

  • arbitrage - keep correlated assets close in price (SPX index versus the 500 stocks contained in it, or Gold trading in London versus Gold trading in New York)

  • market making - buy on bid, sell on ask, gain the spread

  • liquidity rebate - some venus pay you for putting limit orders in the book. Put in a limit order to buy, when it's hit try to sell at the same price that you bought at (or better) and gain the rebate. Works best on high volume, low price assets.

  • predatory trading - seek big hidden liquidity in the market and front-run it

  • behavioral trading - quantify market sentiment and trade on it (analyze tweets, determine global/regional mood and use known psychological theories to predict the effect on market behavior)

  • event trading - analyze news (electronic, paper, blogs, twits) and predict market impact of new relevant facts (litigation, new products, new management, ...)

  • 3
    $\begingroup$ Market makers buy at the bid and sell at the ask. $\endgroup$ – Louis Marascio Oct 25 '13 at 11:58

There is no official taxonomy of quant trading models. After all, "valuations" are inherently subjective, no matter how much math we put behind them. But there are some industry-standard terms that might be helpful.

Inside the Black Box has the following break-down:

  • Price
    • Trend
    • Reversal
  • Fundamental
    • Yield
    • Growth
    • Quality

It's also possible to break-down by implementation:

  • Time horizon: ranging from long-term to high-frequency
  • Bet structure: relative or intrinsic
  • Instruments: liquid or illiquid

And these don't even get into portfolio construction, position limits, risk monitoring, etc.

As for what works, keep this maxim in mind:

Bulls make money, bears make money, but pigs get slaughtered.

And lastly, comparing chartists to quants is like comparing astrologists to astronomers.

  • $\begingroup$ Thanks for the answer! According to that I can say I am interested on "Price" since all the Fundamental stuff is too complicated for the moment, now I just have to find pointers for "Trend" and "Reversal" strategies. Why are chartists astrologists? it looks reasonable to write an algorithm looking for ascending triangles and buying at the break point. You could look at historical data and say that strategy works 62% of times with a win/loss ratio of 2$/1$. Then you test it live to see if you get the same numbers... (I'm really curious about the horoscope comparison) $\endgroup$ – Terco Feb 8 '11 at 19:55
  • 7
    $\begingroup$ @Terco If you could actually set-up a real back-test, you'd be a quant. Just looking at charts to spot patterns with the human eye is a Rorschach test. $\endgroup$ – chrisaycock Feb 8 '11 at 20:19

The categories for systematic trading strategies are

  1. Chart Patterns
  2. Technical Indicators
  3. Quant Trading Strategies
  4. Machine Learning/Artificial Intelligence

The description of these categories is below.

  1. Chart Patterns: Different patterns are used to identify the trading signals such as head and shoulders, trend lines and support and resistance levels

  2. Technical Indicators: These strategies mainly use the technical indicators such as RSI, MACD to determine the trading signals

  3. Quant Trading Strategies: Advanced tools such as statistics are used to generate the trading signals. Example, statistical arbitrage using cointegration

  4. Machine Learning Strategies: Different machine learning algorithms are employed such as very basic linear regression to more advanced LSTM (neural network)

With each of these main categories, there are different styles based on the frequency of trades such as low-frequency trading (LFT), medium frequency trading (MFT) and high-frequency trading (HFT)

There can be further subcategories categories based on the data used such as

  1. Price data (OHLCV)
  2. Fundamental Data
  3. Sentiments Data

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.