# Trading Strategies

This note will describe the main categories of trading strategies.

There are 2 main trading strategies: Trend Following and Mean Reversion.

There are other strategies as well, but they will be elaborated on at a later stage.

## Trend Following

**Objective:** To enter when a new trend is established, and exit when the trend is over.

**Indicators:**

Moving averages (most common)

Trendlines

Average Directional Index (measure trend strength)

Linear Regression (forecast, slope)

Supertrend

**Challenge**: Maintain small losses for losing trades.

**Summary**

Trend following have a few great trades with larger profits, and small losses on a larger amount of trades. Can go through periods of poor performance.

## Mean Reversion

**Objective:** Assuming the price will revert back to a mean. Look to buy oversold, and sell overbought.

**Indicators:**

- Relative Strength Index
- Bollinger Bands
- Disparity Index (distance from moving average)
- Stochastic oscillator

**Challenge:** Mean reversion is exposed to left tail risk (huge infrequent losses). Can take a long time to recover from big losses.

**Summary:** Mean reversion typically have small consistent profits, and low volatility in the strategy.

## Trend Following vs Mean Reversion

Comparison of key performance metrics:

Performance Metric | Trend Following | Mean Reversion |
---|---|---|

Win rate | Low | High |

Trade duration | Long | Short |

Number of trades | Low | High |

Profit per trade | Higher | Low |

Volatility | High | Low |