Trend following vs mean reversion

Every automated strategy carries an assumption about how prices behave. Most fall into one of two families, and they disagree about almost everything.

Trend following: moves continue

A trend follower assumes that a price which has started moving will keep moving for a while. It buys strength and sells weakness.

• EMA cross buys when a fast moving average crosses above a slow one and exits when it crosses back.
• Donchian breakout buys when the price breaks above its highest point of the last N bars and exits below the lowest point of the last M.
• Momentum (ROC) holds while the price is up more than a threshold over its lookback and steps aside when the momentum fades.
• Anti-martingale adds to a position only while it is winning and leaves on a trailing stop.

The typical record is many small losses and a few large wins. In a sideways market the signals keep firing and reversing, and each false start costs a little. When a real trend arrives, one trade can pay for all of them. The win rate is often low, and that can still be a good run.

Mean reversion: moves fade

A mean-reversion strategy assumes the opposite: a price stretched far from its usual level will tend to come back. It buys weakness and sells strength.

• Grid buys a slice on each step down and sells it one step up.
• Bollinger reversion buys dips below the lower band and sells the return to the middle.
• RSI reversion buys extreme oversold readings, but only while the price is above its longer average, and can short extreme overbought ones.

The typical record is the reverse: many small wins and an occasional large loss, when the price that was "too low" keeps falling. The win rate is usually high, and it says little about that one loss.

The three tags in the catalog

A9's strategy list groups strategies by the market they are built for, as the answer to "what do you think the market will do?".

• Ranging: swings up and down without a clear direction. Grid, Bollinger reversion and RSI reversion.
• Trend: moves one way and keeps going. EMA cross, Donchian breakout, momentum and anti-martingale.
• Accumulation: rises over the long run, and you would buy in slices and wait. Martingale and Smart DCA.

Accumulation is a third temperament rather than a third theory. Its strategies buy more as the price falls, like a mean-reverter, but they are built to hold through the dip and sell on recovery, not to trade a range.

Reading the market page

Each stock's market page shows a technicals reading, from strong sell to strong buy, built from common indicators over recent prices. A9 maps it onto the same three tags.

• Buy or strong buy (the price leans up): Trend.
• Neutral (sideways): Ranging.
• Sell or strong sell (the price leans down): Accumulation, for someone who wants to buy lower.

The reading describes the recent past. It is a reasonable place to start choosing, not a forecast, and it can change in a day.

Choosing between them

Ask which market would hurt the strategy, and how badly. A trend follower bleeds slowly in a range; a mean-reverter is hit hard by a one-way move. Neither is better in general. Backtest both on the same symbol and window, compare the drawdowns as well as the returns, and prefer the one whose worst stretch you could sit through.