Alpha classics – trend-following, mean reversion, breakout, and momentum

Let’s quickly recap the idea of generating alpha: we want to beat the market or perform better than an index (or just the rate itself in FX trading) by actively managing the position in the market. This means we try to buy when we expect the price to go up and we try to sell when we expect the price to go down.

Therefore, in order to successfully generate alpha, we basically have only two options: either we suppose that the price will continue moving in an already established direction, or we anticipate a change. In the former case, we make an attempt to buy when prices go higher and sell when they go down. In the latter case, we try to buy when prices go down and sell when they go up.

Note for nerds

In all the discussions and examples here, I intentionally don’t go deep into mathematics. We are focusing on the qualitative side of these phenomena to better understand their nature...