An algorithm is a set of rules and in trading, they are without the need for human presence. Trading algorithmic strategies that are employed by traders have broad grouping that can be used to help in making automated orders during stock exchange like momentum-based strategies/trend following algorithmic trading strategies. Arbitrage algorithmic, statistical arbitrage and market-making algorithmic trading strategy are the other categories.
Momentum-based strategies seek to profit from the volatility of the trade. Suppose that there is a certain trend in trading, as a trader, you are going to be aware of it. With predictions, you may know that the market will fall within the week and through statistics, you can find out if the trend will carry on or change in the coming weeks. Through this, you can make a well-informed move that is based on the market changes which you have determined through statistics.
After monitoring how the market swings, you can need to apply this strategy in your trade to profit from it, in other words, buy high and sell higher and vice versa. You can achieve this through short-term positions whereby you take positions over a short period in stocks that are swinging in a certain direction. Stocks might fall or rise, and you maintain your position until they show signs of changing in the opposite direction. Value investing is done over a long period of reversion but momentum investing is based on the time before mean reversion occurs. It looks to systematically take advantage of other traders who are making errors due to emotions while monitoring.
Momentum works because of behavioral and emotional errors that are shown by traders during trading. However, you should be aware that trends are bound to change, and they can start going the opposite direction immediately after hitting the peak. This kind of strategy is in itself highly volatile as it takes advantage of the rapid changes in the market. There is a need to know the right time to buy and sell your assets to minimize losses and this can be aided by knowing how to manage the risks properly and putting in places the right stop losses. You should properly monitor the changes and be so diverse during trading so as to caution yourself against crashes.
Modelling your ideas around this strategy requires you to be sensitive to price momentum or changes in the marketplace. You can detect trade by monitoring stocks and ETFs that have been on a certain rise or fall for some time. There are different types of this strategy, and for you to understand which direction stock prices are moving, you can look at the earnings. You can use strategies relying on past earnings or earnings surprises which capitalize on traders reacting to the information and news they get. Earnings strategy allows you to profit from reactions and it is usually for a short period. Strategies based on price allow you to profit from slow responses in the market to a lot of information that requires long period investments such as profitability later.