Strategy Types

Common strategy families, assessed against the academic literature. This section explains how a strategy works, what the research finds, and where the weaknesses lie. It doesn't tell you what to buy, and names no signals or parameters to trade on.

Strategy types overviewAn overview of common strategy families: momentum, mean reversion, value screening, pairs trading, and automated bots. Education, not a guide to trade on.Momentum and trend followingSecurities that recently did well kept outperforming on average over the following months. The effect is well documented, but comes with sharp drawdowns and weakens once it becomes known.Mean reversionWhere momentum bets on continuation, mean reversion bets on reversal: whatever recently ran extremely strong or weak tends to return toward the average. The effect shows up over very short and very long horizons, but barely over medium ones.Value investing as a systematic strategyStocks with a low price relative to book value historically beat more expensively valued stocks. The value premium is one of the longest-known anomalies, but its existence and size have been contested for years.Pairs trading and statistical arbitrageTwo securities that normally move similarly are traded once they diverge, in expectation that the gap will close again. Historically well documented, with a clearly documented decline in profitability since the early 2000s.Grid-trading and DCA botsA grid bot places a ladder of buy and sell orders across a price range and earns on every swing. That only works as long as the price stays in the range, and fails exactly when a market runs strongly in one direction.