Different factors contribute to the variance of stock trading systems. The main two categories of stock trading system are called mean reverting system and the other as trend following system. Though both the systems are connected with thecurrent price movements the earlier one fades the movement whereas the later one follows the movement.
Extremes trigger mean reverting systems and corrective price action is the main point that is concentrated.There are two popular reverting systems one is relative strength and the other is oscillators like stochastics.Relative strength relies on recent price action. If RSI is more than 70 system is said to be long and short if it is less than 30.Snapping back from the extremes when price gets overextended is the basic threory. When the slow stochastics is crossed below by the fast stochastics a short occurs. Higher than normal win percentage is the criteria for mean reverting systems and they generally do not have large winners.
Momentum is the important thing that trend following systems hope to capitalize on. Choppy trading and large periods of drawdowns are characterestic of trend following system.Large winning trade is the crux though the winning percentage is hardly over 40%. Entire return for a year could come from one winning trade. Trade lasting could be for a short or long time. Long inititated on a break out new high is one of the most popular trend following systems. If there is profit, piling up to an existing position means pyramiding. This is seen in some systems. Moving average corssover is another popular system. Different time lengths of two moving averages is established. When a longer slower moving average is crossed below by a shorter faster moving average then a short postion is established. Reverse action brings about a long position.
The same charateristics are shared by most of the systems which fall in either of the categories. By marrying the two in trading regimes some new strategies emerge. Here the prevailing theme is protected and trade that individual regime.
