What types of trading algorithm exists ?

Any sorts of trading algorithms can be categorized in two broad category, A trend following system and reversal, note that a trend following does not mean some combination of certain indicators like MACD or RSI, definition of a trend following exists without any indicator, although a trend following system can be made using built in indicator. For most time trend following systems are used.

reversal signal


A one liner definition for trend following can ┬ábe a logic – whose nose is always ( or attempting) pointing to current price movement.

Beauty of trend following is that they always generate a signal when price based mathematical conditions are met, so you never miss any move and also due this, stop loss is built into the system, therefore money management is never an issue for trend system.

Downside of trend following is, that they suffer from significant lags, and if lags are tried to reduced, whipsaw problem starts surfacing. Usage of trend following system is suitable only for longer trade like swing trading or for investing.

Now coming to other type of signal system called Reversal, which is opposite to trend following system, they are not for everyone and you must have expert trading skills and swiftness, they can be used in intraday trading, reversal signal attempt to head-on with active trend, this is why they feel risky to many traders.

A reversal system usually gives buy/sell signal, towards the end of steep rally or fall, when slow churning moves happen they don’t generate signal. mostly you also need a stop loss to use them. reversal signal may provides you best price for entry when done with manual analysis they can be excellent day trading tool.

Abhishek K

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