Unbiased Algo Trading Strategies – Momentum, Mean Reversion & Arbitrage Explained

 

Unbiased Algo Trading Strategies – Momentum, Mean Reversion & Arbitrage Explained

 

In algorithmic trading, strategies are designed to be rule-based, meaning they don’t rely on emotions or human judgment. This helps eliminate bias from trading decisions. Let’s explore three of the most popular unbiased algo strategies in simple terms:

 

1️⃣ Momentum Strategy – “Go with the trend”

Core Idea:
Stocks that have been going up tend to keep going up — for a while.

How it works:

• The algorithm looks for stocks showing strong upward or downward movement with increasing volume.
• If momentum is positive, it goes long (buy); if negative, it goes short (sell).

Example:
If a stock has risen steadily for the past 5 days with strong volume, the algo might place a buy trade expecting the trend to continue.

✅ Pros: Trend-following, can capture quick gains
⚠️ Cons: Can fail during sideways or choppy markets

 

2️⃣ Mean Reversion Strategy – “What goes up must come down”

Core Idea:
Prices tend to revert to their average (mean) over time.

How it works:

• The algo identifies when an asset is overbought or oversold using indicators like RSI, Bollinger Bands, or moving averages.
• If the price is too far from the average, the algo expects it to “revert” and trades accordingly.

Example:
If a stock drops sharply by 10% in a short time but the fundamentals remain strong, the algo might buy expecting a recovery.

✅ Pros: Good for range-bound markets, low-risk entry points
⚠️ Cons: Doesn't work well in strong trending markets

 

3️⃣ Arbitrage Strategy – “Buy low here, sell high there”

Core Idea:
Take advantage of price differences for the same asset across different markets or forms.

How it works:

• The algo monitors two or more markets (like NSE & BSE) for the same asset.
• If a price mismatch is detected, it simultaneously buys in the cheaper market and sells in the higher-priced one.

Example:
If Nifty futures are trading at ₹100.25 on NSE and ₹100.55 on BSE, the algo will buy on NSE and sell on BSE for a ₹0.30 profit per unit.

✅ Pros: Low risk, quick profits
⚠️ Cons: Requires ultra-fast execution and low latency

 

🧠 Final Thoughts

These strategies are considered unbiased because they follow strict logic and predefined rules — no gut feelings, no panic. For anyone getting into algo trading, starting with a simple momentum or mean reversion strategy and backtesting it thoroughly is a great first step.