Investment strategies are crucial for investors to achieve their financial goals. A predictable investment strategy provides more certainty and lower risks. There are various types of predictable strategies like trend trading, mean reversion, carry trade etc. The key is finding an approach that fits your risk appetite and investment horizon. This article will explain predictable strategy examples and key considerations for selecting them.
Trend trading – Follow the momentum
Trend trading aims to profit from the persisting uptrend or downtrend of an asset. One example is moving average crossover strategy which goes long when a shorter period moving average crosses above a longer period moving average, signaling an uptrend. This follows the momentum of price movements. Other examples include cross-sectional momentum of taking long and short positions based on past relative performance and time-series momentum based on absolute returns over a lookback period.
Mean reversion – Bet on the reversal
Mean reversion strategies assume that asset prices and indicators will eventually revert back to their long-term mean or average. For instance, buying undervalued stocks with attractive valuations and fundamental factors, expecting their prices to revert upwards. Another example is statistical pairs trading which exploits short-term deviations from the historical price relationship between two correlated assets.
Carry trade – Harvest the yield spread
Carry trades aim to profit from the yield spread between two assets. A common example is borrowing in low interest rate currencies and investing in high yield currencies and assets. The carry generates steady returns, so long as the exchange rate remains stable. Risk comes when unwinding carry trades trigger sharp currency moves.
Assess strategy characteristics
When evaluating predictable strategies, key aspects to consider are risk-return profile, holding period, complexity, liquidity needs and personal preferences. Trend following provides upside in bull markets but lags in range-bound markets. Mean reversion works in sideways markets but fails in long trends. Carry trades offer stable cash flows but face drawdowns in volatility spikes. No single approach works all the time. Blend complementary strategies and size positions appropriately.
Predictable investment strategies like trend, mean reversion and carry trades have characteristics that suit different market environments and investor goals. Assessing the strategy’s risk-return profile across market cycles, implementation complexity and personal preferences is crucial for selection success.