One of the most basic and common algorithmic trading systems followed by investors is a momentum investing strategy. This type of investing looks for the market trend to move significantly in one direction on high volume. This trading system can either be very simple or significantly difficult. A simple momentum investing strategy might invest in the five best performing shares in an index that is based on a 12-month performance. A more difficult strategy may blend momentum over time, making use of both relative and absolute momentum. Furthermore, using this system enables investors to rebalance momentum systems weekly, monthly, quarterly, or even yearly.
Mean reversion systems exploit the tendency of many asset prices to revert to the mean after periods where they become either oversold or overbought. Investors following this strategy generally assume that the price of the stock will eventually revert back to its long-time, average price. They will purchase assets when they trade at the lower end of a trading range. And, when the assets approach the center of the trading range or a moving average, investors choose to sell them.
Factor-based investing is a strategy used by investors to choose securities on attributes that are related to higher returns, based on historical data. In this system, there are two main types of factors that have driven returns of stocks, bonds, and other factors. Noteworthy factors include market capitalization, momentum, earnings momentum, beta, and free cash flow. Many financial investors will combine these factors using a static weighing system, or a dynamic allocation.