trading-edge

Before moving to trading bots, I will summarize here about the Indicators used in "Cross-sectional Momentum" and "Mean Reversion" mentioned in other casts.

Cross-sectional Momentum:

This strategy aims to identify assets with strong momentum, i.e., those that have shown superior performance in the recent past. To do this, indicators are used that measure the strength and direction of the price trend. Some of the most common are:

Ind 1. Past performance: The asset's return over a given period, e.g., the last 30 days, is calculated. The assets with the highest returns are selected, assuming that they will continue their upward trajectory.

Why? It is a simple and direct indicator that reflects the strength of momentum.

Ind 2. Trading volume: High volume can indicate strong interest in the asset and confirm the validity of the trend.

Why? Volume acts as a measure of the conviction behind the price movement.

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Indicators used in "Mean Reversion" strategies:

This strategy aims to identify assets that have deviated significantly from their historical average and are therefore highly likely to revert to that average. Indicators are used that measure the distance of the current price from its average and that identify overbought or oversold conditions. Some of the most common are:

Ind 1. Moving averages: The current price of the asset is compared to its moving average (simple or exponential) of a given period. If the price is well above or below the average, it is considered overbought or oversold, respectively.

Why? The moving average acts as a benchmark to identify significant price deviations.

Ind. 2. Stochastic Oscillator: Compares the closing price of an asset to its price range over a given period. Values above 80 indicate overbought and values below 20 indicate oversold.

Why? It helps to identify times when price momentum is losing strength and a reversal is likely.