Trading Strategies Explained

Using computer rules to generate, route, or execute orders.

Example: An algorithm splits a large order to reduce market impactThe price movement caused by placing or executing an order..

Algorithmic Trading means using computer rules to generate, route, or execute orders; the strategy should be written as a repeatable process rather than identified retrospectively from a chart after the outcome is known.

For example, an algorithm splits a large order to reduce market impact.

Evaluate Algorithmic Trading out of sample and compare it with a simple benchmarkA reference index or rate used to evaluate a fund's performance.; record every signal, including trades that were skipped or could not be executed. A profitable period does not establish that the strategy works across market regimes.

Seeking to profit from price differences for the same or closely related assets while limiting directional risk.

Example: A trader buys an ETF below NAV and sells the underlying basket.

Arbitrage describes seeking to profit from price differences for the same or closely related assets while limiting directional risk; the strategy is a rule or market pattern used to decide what to buy or sell, when to act and how much risk to take.

For example, a trader buys an ETF below NAV and sells the underlying basket. For Arbitrage, performance should include every qualifying occurrence rather than selected successful cases.

For Arbitrage, define the data, entry, exit, position size and maximum loss before testing it across several market regimes with realistic transaction costs; frequent false signals can overwhelm a small statistical advantage.

A move below a recognised support level or trading rangeThe span between an asset's high and low price over a period..

Example: The stock breaks down after losing its previous low.

Breakdown is a move below a recognised support level or trading range; the result from the strategy combines signal quality with execution, position sizing, transaction costA cost arising from buying, selling, settling, or transferring an investment. and the discipline of the exit rule.

The stock breaks down after losing its previous low. For Breakdown, performance should include every qualifying occurrence rather than selected successful cases.

Evaluate Breakdown out of sample and compare it with a simple benchmark; record every signal, including trades that were skipped or could not be executed. The strategy can look reliable in hindsight because charts make completed patterns easier to see.

A move beyond a recognised price range or technical level.

Example: The share breaks above resistance on unusually high volume.

Breakout is a move beyond a recognised price range or technical level; the strategy is a rule or market pattern used to decide what to buy or sell, when to act and how much risk to take.

The share breaks above resistance on unusually high volume. For Breakout, performance should include every qualifying occurrence rather than selected successful cases.

For Breakout, define the data, entry, exit, position size and maximum loss before testing it across several market regimes with realistic transaction costs; the strategy can look reliable in hindsight because charts make completed patterns easier to see.

Buying a securityA tradable financial claim or ownership interest, such as a share, bond, or fund unit. to close an existing short position.

Example: The trader covers the short after the price falls 15%.

Covering a Short means buying a security to close an existing short position; the strategy should be written as a repeatable process rather than identified retrospectively from a chart after the outcome is known.

The trader covers the short after the price falls 15%.

Evaluate Covering a Short out of sample and compare it with a simple benchmark; record every signal, including trades that were skipped or could not be executed. Back-tested results results can disappear after costs and realistic execution.

Opening and closing positions within the same trading day.

Example: The trader exits every position before the market closes.

Day Trading describes opening and closing positions within the same trading day; the result from the strategy combines signal quality with execution, position sizing, transaction cost and the discipline of the exit rule.

The trader exits every position before the market closes.

Evaluate Day Trading out of sample and compare it with a simple benchmark; record every signal, including trades that were skipped or could not be executed. Back-tested results results can disappear after costs and realistic execution.

A pattern of generally falling prices, often marked by lower highs and lower lows.

Example: The stock enters a downtrend after repeated earnings disappointments.

Downtrend is a pattern of generally falling prices, often marked by lower highs and lower lows; the result from the strategy combines signal quality with execution, position sizing, transaction cost and the discipline of the exit rule.

The stock enters a downtrend after repeated earnings disappointments.

Before using Downtrend, identify the condition that invalidates the setup and the liquidityThe ease and speed with which an investment can be converted into cash without a major price concession. needed to exit without turning a planned loss into a larger one; a profitable period does not establish that the strategy works across market regimes.

A moving average that assigns greater weight to more recent observations.

Example: The 20-day EMA reacts faster to new prices than the 20-day SMA.

Exponential Moving Average is a moving average that assigns greater weight to more recent observations. The entry condition is only one part of the method; invalidation, holding periodThe length of time an investment is owned. and loss control determine whether it can be implemented.

The 20-day EMA reacts faster to new prices than the 20-day SMA.

A practical review of Exponential Moving Average separates the forecasting rule from risk management and measures drawdownA decline from a previous portfolio or asset-value peak., turnover, win rate and payoff per trade; a profitable period does not establish that the strategy works across market regimes.

Automated trading characterised by very fast data processing, order submission, and short holding periods.

Example: A high-frequency firm competes to quote prices within milliseconds.

High-Frequency Trading describes automated trading characterised by very fast data processing, order submission, and short holding periods. The entry condition is only one part of the method; invalidation, holding period and loss control determine whether it can be implemented.

A high-frequency firm competes to quote prices within milliseconds.

Before using High-Frequency Trading, identify the condition that invalidates the setup and the liquidity needed to exit without turning a planned loss into a larger one; back-tested results results can disappear after costs and realistic execution.

Ownership or exposure that benefits when an asset's price rises.

Example: An investorA person or organisation that commits capital with the expectation of a financial return. buying 1,000 shares holds a long position.

Long Position means ownership or exposure that benefits when an asset's price rises; the strategy should be written as a repeatable process rather than identified retrospectively from a chart after the outcome is known.

An investor buying 1,000 shares holds a long position.

For Long Position, define the data, entry, exit, position size and maximum loss before testing it across several market regimes with realistic transaction costs.

A strategy holding long positions in favoured assets and short positions in less-favoured assets.

Example: The fund buys strong banks and shorts weak banks.

Long-Short Strategy is a strategy holding long positions in favoured assets and short positions in less-favoured assets. The entry condition is only one part of the method; invalidation, holding period and loss control determine whether it can be implemented.

The fund buys strong banks and shorts weak banks.

A practical review of Long-Short Strategy separates the forecasting rule from risk management and measures drawdown, turnover, win rate and payoff per trade.

A strategy designed to minimise broad market exposure while profiting from relative differences.

Example: Equal long and short sector exposures leave little net equity beta.

Market-Neutral Strategy is a strategy designed to minimise broad market exposure while profiting from relative differences; the result from the strategy combines signal quality with execution, position sizing, transaction cost and the discipline of the exit rule.

Equal long and short sector exposures leave little net equity beta.

Before using Market-Neutral Strategy, identify the condition that invalidates the setup and the liquidity needed to exit without turning a planned loss into a larger one; the strategy can look reliable in hindsight because charts make completed patterns easier to see.

A strategy that trades securities involved in an announced merger or acquisitionThe purchase of control or ownership of a company or business..

Example: The investor buys the target below the offer priceThe price at which a fund or market participant sells units or securities to an investor. while accepting deal-failure risk.

Merger Arbitrage is a strategy that trades securities involved in an announced merger or acquisition. The entry condition is only one part of the method; invalidation, holding period and loss control determine whether it can be implemented.

The investor buys the target below the offer price while accepting deal-failure risk.

A practical review of Merger Arbitrage separates the forecasting rule from risk management and measures drawdown, turnover, win rate and payoff per trade.

The tendency of assets with strong recent performance to continue outperforming for a period.

Example: A momentum strategy buys shares making sustained relative gains.

Momentum is the tendency of assets with strong recent performance to continue outperforming for a period; the result from the strategy combines signal quality with execution, position sizing, transaction cost and the discipline of the exit rule.

A momentum strategy buys shares making sustained relative gains. For Momentum, performance should include every qualifying occurrence rather than selected successful cases.

Before using Momentum, identify the condition that invalidates the setup and the liquidity needed to exit without turning a planned loss into a larger one; back-tested results results can disappear after costs and realistic execution.

The average price over a rolling number of periods.

Example: A 50-day moving average smooths daily price noise.

Moving Average is the average price over a rolling number of periods; the strategy should be written as a repeatable process rather than identified retrospectively from a chart after the outcome is known.

A 50-day moving average smooths daily price noise. For Moving Average, performance should include every qualifying occurrence rather than selected successful cases.

Evaluate Moving Average out of sample and compare it with a simple benchmark; record every signal, including trades that were skipped or could not be executed. Back-tested results results can disappear after costs and realistic execution.

A momentum indicator derived from the relationship between two exponential moving averages.

Example: A trader watches for changes in the MACD line and signal line.

Moving Average ConvergenceThe tendency of a futures price and spot price to move together as expiration approaches. Divergence is a momentum indicator derived from the relationship between two exponential moving averages; the strategy should be written as a repeatable process rather than identified retrospectively from a chart after the outcome is known.

A trader watches for changes in the MACD line and signal line.

For Moving Average Convergence Divergence, define the data, entry, exit, position size and maximum loss before testing it across several market regimes with realistic transaction costs; the strategy can look reliable in hindsight because charts make completed patterns easier to see.

A relative-value strategyA strategy seeking to profit from price differences between related securities while limiting broad market exposure. that trades two historically related securities in opposite directions.

Example: The trader buys one bank and shorts another after their valuation spread widens.

Pairs Trading is a relative-value strategy that trades two historically related securities in opposite directions; the strategy is a rule or market pattern used to decide what to buy or sell, when to act and how much risk to take.

For example, the trader buys one bank and shorts another after their valuation spread widens.

Before using Pairs Trading, identify the condition that invalidates the setup and the liquidity needed to exit without turning a planned loss into a larger one; a profitable period does not establish that the strategy works across market regimes.

Holding a trading position for weeks, months, or longer based on a broad trend or thesis.

Example: The trader follows a multi-month commodityA standardised physical good such as gold, crude oil, wheat, or cocoa. uptrend.

Position Trading means holding a trading position for weeks, months, or longer based on a broad trend or thesis. The entry condition is only one part of the method; invalidation, holding period and loss control determine whether it can be implemented.

The trader follows a multi-month commodity uptrend.

Evaluate Position Trading out of sample and compare it with a simple benchmark; record every signal, including trades that were skipped or could not be executed. Back-tested results results can disappear after costs and realistic execution.

A market moving between relatively stable support and resistance levels without a clear trend.

Example: The index fluctuates between 60,000 and 65,000 for several months.

Range-Bound Market is a market moving between relatively stable support and resistance levels without a clear trend. The entry condition is only one part of the method; invalidation, holding period and loss control determine whether it can be implemented.

The index fluctuates between 60,000 and 65,000 for several months.

Evaluate Range-Bound Market out of sample and compare it with a simple benchmark; record every signal, including trades that were skipped or could not be executed. A profitable period does not establish that the strategy works across market regimes.

A momentum oscillator comparing the magnitude of recent gains and losses on a scale from zero to 100.

Example: A trader uses RSI as one input when assessing an extended price move.

Relative Strength Index is a momentum oscillator comparing the magnitude of recent gains and losses on a scale from zero to 100; the strategy should be written as a repeatable process rather than identified retrospectively from a chart after the outcome is known.

A trader uses RSI as one input when assessing an extended price move.

Before using Relative Strength Index, identify the condition that invalidates the setup and the liquidity needed to exit without turning a planned loss into a larger one; back-tested results results can disappear after costs and realistic execution.

A price area where selling has historically been strong enough to slow advances.

Example: The share struggles to move above ₦75.

Resistance Level is a price area where selling has historically been strong enough to slow advances; the strategy is a rule or market pattern used to decide what to buy or sell, when to act and how much risk to take.

The share struggles to move above ₦75.

Before using Resistance Level, identify the condition that invalidates the setup and the liquidity needed to exit without turning a planned loss into a larger one; back-tested results results can disappear after costs and realistic execution.

Exposure that benefits when an asset's price falls.

Example: A trader borrows and sells shares, planning to repurchase them lower.

Short Position describes exposure that benefits when an asset's price falls; the strategy is a rule or market pattern used to decide what to buy or sell, when to act and how much risk to take.

A trader borrows and sells shares, planning to repurchase them lower.

For Short Position, define the data, entry, exit, position size and maximum loss before testing it across several market regimes with realistic transaction costs; back-tested results results can disappear after costs and realistic execution.

Selling a borrowed security with the intention of buying it back later.

Example: The seller profits if the repurchase price is below the original sale price.

Short Selling describes selling a borrowed security with the intention of buying it back later; the result from the strategy combines signal quality with execution, position sizing, transaction cost and the discipline of the exit rule.

For example, the seller profits if the repurchase price is below the original sale price.

For Short Selling, define the data, entry, exit, position size and maximum loss before testing it across several market regimes with realistic transaction costs; a profitable period does not establish that the strategy works across market regimes.

A rapid price rise intensified when short sellers buy shares to close losing positions.

Example: Unexpected good news forces heavily shorted traders to cover.

Short Squeeze is a rapid price rise intensified when short sellers buy shares to close losing positions. The entry condition is only one part of the method; invalidation, holding period and loss control determine whether it can be implemented.

For example, unexpected good news forces heavily shorted traders to cover.

Before using Short Squeeze, identify the condition that invalidates the setup and the liquidity needed to exit without turning a planned loss into a larger one; back-tested results results can disappear after costs and realistic execution.

A moving average giving equal weight to each observation in the selected window.

Example: The 20-day SMA adds the last 20 closes and divides by 20.

Simple Moving Average is a moving average giving equal weight to each observation in the selected window; the result from the strategy combines signal quality with execution, position sizing, transaction cost and the discipline of the exit rule.

The 20-day SMA adds the last 20 closes and divides by 20.

For Simple Moving Average, define the data, entry, exit, position size and maximum loss before testing it across several market regimes with realistic transaction costs; frequent false signals can overwhelm a small statistical advantage.

A systematic strategy that uses statistical relationships to identify short-lived relative mispricing.

Example: A model trades temporary divergences among similar shares.

Statistical Arbitrage is a systematic strategy that uses statistical relationships to identify short-lived relative mispricing; the strategy is a rule or market pattern used to decide what to buy or sell, when to act and how much risk to take.

A model trades temporary divergences among similar shares. For Statistical Arbitrage, performance should include every qualifying occurrence rather than selected successful cases.

A practical review of Statistical Arbitrage separates the forecasting rule from risk management and measures drawdown, turnover, win rate and payoff per trade.

A price area where buying has historically been strong enough to slow declines.

Example: Buyers repeatedly appear near ₦50.

Support Level is a price area where buying has historically been strong enough to slow declines; the strategy should be written as a repeatable process rather than identified retrospectively from a chart after the outcome is known.

Buyers repeatedly appear near ₦50.

Before using Support Level, identify the condition that invalidates the setup and the liquidity needed to exit without turning a planned loss into a larger one; frequent false signals can overwhelm a small statistical advantage.

Holding positions for several days or weeks to capture medium-term price moves.

Example: A swing trader buys after a breakout and exits two weeks later.

Swing Trading means holding positions for several days or weeks to capture medium-term price moves; the strategy should be written as a repeatable process rather than identified retrospectively from a chart after the outcome is known.

A swing trader buys after a breakout and exits two weeks later.

A practical review of Swing Trading separates the forecasting rule from risk management and measures drawdown, turnover, win rate and payoff per trade; back-tested results results can disappear after costs and realistic execution.

The study of price, volume, and market behaviour to identify patterns or trading signals.

Example: A trader uses trend lines and moving averages to plan entries.

Technical Analysis is the study of price, volume, and market behaviour to identify patterns or trading signals; the result from the strategy combines signal quality with execution, position sizing, transaction cost and the discipline of the exit rule.

A trader uses trend lines and moving averages to plan entries.

For Technical Analysis, define the data, entry, exit, position size and maximum loss before testing it across several market regimes with realistic transaction costs; a profitable period does not establish that the strategy works across market regimes.

A persistent direction in price or market movement.

Example: The index forms a rising trend over six months.

Trend is a persistent direction in price or market movement. The entry condition is only one part of the method; invalidation, holding period and loss control determine whether it can be implemented.

The index forms a rising trend over six months.

A practical review of Trend separates the forecasting rule from risk management and measures drawdown, turnover, win rate and payoff per trade; frequent false signals can overwhelm a small statistical advantage. Also compare Uptrend, defined here as a pattern of generally rising prices, often marked by higher highs and higher lows.

A pattern of generally rising prices, often marked by higher highs and higher lows.

Example: The share remains in an uptrend while each pullback stays above the previous low.

Uptrend is a pattern of generally rising prices, often marked by higher highs and higher lows. The entry condition is only one part of the method; invalidation, holding period and loss control determine whether it can be implemented.

The share remains in an uptrend while each pullback stays above the previous low. For Uptrend, performance should include every qualifying occurrence rather than selected successful cases.

Evaluate Uptrend out of sample and compare it with a simple benchmark; record every signal, including trades that were skipped or could not be executed.