There are different types of trading strategies which differ in terms of their time horizon, risk profiles, capital requirements, as well as liquidity and volatility needed for a correct execution. These algorithmic trading strategies can be classified into the following types:
- Momentum Strategies
- Mean Reversion Strategies
- Market Making Strategies
- Intra-day Momentum or Day Trading Strategies
Each of these strategies have different risk-reward ratios, and traders and investors should base their trading plan based on their own profile and preferences. For example, if a trader cannot stand overnight gaps and some drawdowns in the course of a position, their trading style would be more suitable for a Day Trading Strategy. In contrast, if a trader wants to ride trends they would prefer momentum strategies.
The objective of a momentum strategy is to capture the trend of a stock or other asset. So these strategies are best designed for traders with higher time horizon as they have to wait for a trending setup and decide accurate entry and exit points.
On the other hand, market making strategies are for the very short term, and traders wish to exploit inefficiencies in the order book that are produced in seconds or milliseconds.
In the following lessons, we will discuss these trading strategies in more detail.
