Trading strategies are one of the core components of an algorithmic trading system. Without stable, profitable strategies in the long term, an automated system cannot take advantage of the computing power. Even though different strategies may work in different markets, there are major groups of investment strategies below.
Market Neutral
Market neutral is a group of investment strategies undertaken by an investor who simultaneously opens long and short positions in order to minimize market risk on portfolio returns.
Pair trading is a simple and common form of market-neutral strategy.
Statistical arbitrage is also a group of market-neutral strategies that evolved from pair trading. It uses mathematical and statistical models along with computer assistance to make the most of trading opportunities. They may come from abnormal changes in the relative price of one stock compared to another. Statistical arbitrage is difficult for retail investors to access, and ALGOTRADE is making continuous efforts to close the technology gap for these investors.
Price Momentum.
Investors look to buy rising stocks or short-sell falling stocks. This strategy believes that stocks continue to follow the momentum in the short term.
During the Covid years, this was the most widely used strategy in Vietnam. There’s no guarantee, however, this approach will continue to be effective in the long term.
Mean Reversion
This strategy assumes that if a stock’s price is too low compared to its intrinsic value, investors should buy and vice versa. In some cases, the intrinsic value may be replaced by the technical mean.
Event-driven trading strategies take advantage of market inefficiencies from corporate events like mergers and acquisitions, corporate restructures, share buybacks, extraordinary dividends, etc. to trade in the short term. Investors study the situations surrounding these events and assess how they will impact the stock price. They identify potential opportunities that may arise and take advantage of them.
This strategy commonly places orders at the best bid price and the best ask price. It makes profits from the bid-ask spread.
It is a special strategy that focuses on an ultra-short time frame to open and close positions in order to make very small profits. Scalping traders make a lot of transactions daily and expect a very high success rate.
Investors anticipate the action of exchange-traded funds (ETFs) according to the public prospectus and simulate part of the action prior to the fund’s rebalancing.
Arbitrage
Arbitrage is a strategy that takes advantage of a temporary difference in the price of the same asset in two different markets. This strategy trades to make a profit without incurring too much risk.
Grid
This strategy sets up a price grid around a predefined value to make profits from market fluctuations. It works best in an oscillating market with large swings, though having a big risk in trending markets.
Known as a factor-based strategy, this strategy builds portfolios according to rule-based processes. It uses business factors like liquidity, value, and quality as criteria for making trading decisions. It is not widely used yet because it’s necessary to establish an automatic connection to the financial data of all companies in the market.
Sniffing
This strategy relies on real-time transaction data to track the actions of individuals or organizations with large trading volumes. It assumes that these actions will last for days or weeks, and information advantage will ultimately generate significant profits.