110 systematic and discretionary trading strategies

systematic and discretionary trading strategies

In this article, we discuss various systematic and discretionary trading and investment strategies, covering a wide range of approaches, asset classes and time horizons, as well as brief descriptions of each.

Please be aware that many strategies are actually a mixture of both in the real world, but they may tend to be more commonly used in one way or another.

Discretionary and systematic investment strategies are two distinct approaches to investment management. Each has its own characteristics and the differences between the two can have an impact on the overall performance and risk profile of an investment portfolio.

What follows below is an overview of the main characteristics and differences between these two strategies:

Discretionary investment strategies

  • Human decision-making: Discretionary investment strategies rely on the judgement and expertise of a portfolio manager or investor to make investment decisions. This may involve the analysis of individual stocks, economic factors or market trends.
  • Subjective analysis: Investors who use a discretionary approach often base their decisions on personal experience, intuition or subjective assessments of the investment opportunity.
  • Less consistency: Due to the human element, discretionary investment strategies may be less consistent than systematic ones, as they're influenced by the emotions and biases of a decision maker.
  • Flexibility: Discretionary investing offers greater flexibility, as you can adapt to changing market conditions and incorporate new information into your decision-making process.
  • Tailor-made approach: Discretionary strategies can be tailored to the specific objectives, risk tolerance level and preferences of each trader.

Systematic investment strategies

  • A rules-based approach: Systematic investment strategies involve the use of predefined rules or algorithms to make investment decisions. These rules may be based on things such as historical data, quantitative analyses or technical indicators.
  • Objective analysis: Decisions made in a systematic strategy are based on objective criteria, which reduces the potential influence of human emotions or biases.
  • Consistency: Systematic strategies follow a consistent set of rules, which can lead to more predictable outcomes and reduce the likelihood of impulsive or inappropriate investment decisions.
  • Limited flexibility: Systematic trading may be less flexible than discretionary strategies, as it may be more difficult to adapt quickly to changing market conditions or new information.
  • Potential for duplication: Systematic strategies are generally easier to replicate and adapt, as the investment process is rules-based and can be automated using software or computer algorithms.

Discretionary investment strategies

Below are trading and investment strategies that fall more into the "discretionary" realm:

Value-based investing

This is the search for undervalued stocks based on fundamental analysis, often using financial ratios to identify companies that are trading below their intrinsic value.

Growth investing

This consists of focusing on companies with high growth potential that are characterised by rapid increases in revenues, profits and market share, often at the expense of current profitability.

Dividend investing

Investing in companies that pay regular dividends, thereby providing a steady stream of income and the potential for capital appreciation.

Index investing

A passive investment strategy that aims to replicate the performance of a market index, often through index funds or exchange traded funds (ETFs).

Passive investments

A buy-and-hold approach, focusing on minimising fees and taxes, often through index funds, ETFs or other low-cost investment vehicles.

Active investing

Portfolio managers actively select securities, with the aim of outperforming benchmarks, based on either fundamental analysis or technical analysis.

Swing trading

This is when traders attempt to make short- or medium-term gains in a security or market, usually by holding positions for several days or weeks.

Day trading

Buying and selling securities during a single trading day, with the aim of profiting from small price changes.

Scalping

Making numerous quick trades to profit from small price changes, usually by closing positions within minutes.

Position trading

Holding a stock for a long period, like a few weeks or months, based on long-term price trends or shifts.

Sectorial rotation

This is the shifting of investments from one sector to another to take advantage of economic cycles and expected changes in market performance.

For example, this may involve shifting investments from discretionary consumer goods to basic consumer goods when you expect that the economy wil weaken.

Understanding sectorial Rotation & Analysis

Global macroeconomic strategies

Investments based on macroeconomic, geopolitical and other systemic factors that impact asset classes, regions or countries.

Investments focused on events

This involves taking advantage of opportunities created by corporate events, such as mergers, acquisitions, earnings announcements or regulatory changes.

Contrarian investing

This means going against prevailing market trends, buying undervalued assets when others are selling, and selling overvalued assets when others are buying them.

Income-based investments

Focusing on securities that generate a steady stream of income, such as stocks, bonds or real estate investment trusts that pay regular dividends.

Technical analysis

The analysis of past market data, like prices and volumes, to identify patterns and predict future price shifts.

Fundamental analysis

An assessment of the intrinsic value of a stock based on financial and economic factors, including revenues, earnings, industry trends and macroeconomic indicators.

Option trading

The purchase and sale of option contracts, which give you the right, but not the obligation, to buy or sell an underlying asset at a predetermined price by a certain date.

Futures trading

The buying and selling of futures contracts, which are agreements to buy or sell an asset at a predetermined price at a specified future date.

Trading currencies (Forex)

Trading currencies in the foreign exchange market, to try to profit from changes in exchange rates.

Commodity trading

This is when you trade physical commodities, like oil, gold or farm products, or their financial derivatives.

Investing in ETFs

Investing in exchange-traded funds, which are baskets of securities that trade like individual stocks and track an underlying index or investment.

Investing in real estate

This is the purchase, management and sale of real estate to generate income or capital appreciation, including residential, commercial or industrial property. I personally manage several apartments in Paris, the tenants end up paying my mortgage payments, this is how I became a millionaire, ANYONE can do it!

Property funds / Property unit trusts

This involves nvesting in real estate investment companies, which are companies that own, operate or finance income-producing real estate and distribute dividends to shareholders.

Market timing

This is to attempt to predict market movements and making investment decisions based on these predictions, often using technical or economic indicators.

Pair trading

The buying of a long position in a security and selling short of a related security, with the aim of taking advantage of relative price movements.

Risk arbitrage

Taking advantage of price differences in securities involved in major corporate events, such as mergers, acquisitions or spin-offs, by trading a position in the involved companies.

Merger arbitrage

Taking advantage of price differences between target and acquiring companies in a merger or acquisition, usually by buying the target company's shares and short-selling the acquiring company's shares.

Convertible arbitrage

This is when you take advantage of price inefficiencies between convertible securities and their underlying shares, typically by buying the convertible bond and selling the stock short.

Relative value strategies

Find and take advantage of price differences between related securities, usually via long and short positions.

Investments in distressed debt

This is when you invest in debt securities of companies experiencing financial difficulty, often at a deep discount, with the potential for high returns if the company recovers.

Going long/short on stocks or shares

This involves going long in undervalued stocks and shorting overvalued stocks, with the aim of profiting from upward and downward price movements.

Volatility trading

Volatility trading relies on strategies based on the expected volatility of an asset or market, often using options, futures or other derivatives.

Credit trading

Trading in fixed income securities or their derivatives, based on the creditworthiness of the issuer and interest rate movements.

Interest rate trading

This strategy involves trading interest rate sensitive assets or derivatives to profit from interest rate changes.

Investing in emerging markets

This involves investing in countries with developing economies that are often characterised by rapid growth, increasing foreign investment and expanding consumer markets.

Investing in frontier markets

This consists of investing in countries with less developed economies and capital markets, which are often characterised by a higher risk level and higher potential returns.

Investing in small-cap companies

The idea here is to focus on companies with relatively small market capitalisations, which may offer higher growth potential and greater risk than larger companies.

Investing in medium-cap companies

This is when you invest in mid-cap companies, often seen as a good compromise between the growth potential of small-cap stocks and the stability of large-cap stocks.

Investing in large-cap companies

Investing in large-cap companies, often characterised by stabler returns, lower risk and slower growth than smaller companies.

Investing in micro-cap companies

This focuses on companies with very small market capitalisations, often characterised by high growth potential, increased risk and reduced liquidity.

Socially responsible investing (SRI)

This when you make a selection of investments on the basis of ethical, social or environmental criteria, but avoid companies involved in controversial sectors.

Environmental, social and governance (ESG) investments

This is when you integrate environmental, social and corporate governance factors into your investment decisions, with the aim of generating long-term sustainable returns.

Impact investing

When you nvest in companies, organisations or funds with the intention of generating a measurable social or environmental impact in addition to financial returns.

Thematic investing

This involves focusing on specific themes or trends, such as clean energy, ageing populations or technological innovation, in order to identify potential investments.

Tactical asset allocation

Adjustment of a portfolio's asset allocation in response to short-term market conditions or economic indicators, with the aim of taking advantage of opportunities or reducing risks.

Strategic asset allocation

This is the process of setting long-term asset allocation targets based on your risk tolerance, investment objectives and time horizon, generally maintaining a consistent allocation.

Insider trading

When you trade in securities on the basis of non-public information, which is illegal and punishable by law.

Short selling

This involves borrowing and selling a security in the hope that its price will fall, allowing you to buy it back at a lower price and profit from the difference.

Neutral market strategies

When you use long and short positions to achieve a net zero exposure, with the aim of profiting from the performance of an individual stock rather than broader market trends.

Covered call writing

This is the writing of call options on a security that you hold, generating income from option premiums and limiting potential upside gains.

Purchasing protective puts

This is basically the purchase of put options on a security that you hold, providing downside protection in the event of a decline in the price of the security.

Iron condor

An option strategy involving the simultaneous sale of a call and an out-of-the-money put, and the purchase of another call and another out-of-the-money put, a trade structure that benefits from low volatility.

Straddle

This involves the purchase of a call and a put on the same stock, with the same strike price and expiration date, in order to profit from large price movements in either direction.

Strangle

The purchase of a call and an out-of-the-money put option on the same security with the same expiration date in order to profit from large price movements in either direction.

Butterfly spread

This is an option strategy involving the simultaneous purchase and sale of option contracts with different strike prices but the same expiration date, which works best in low volatility.

Calendar spread

This involves the buying and selling of options contracts on the same security with the same strike price but different expiration dates, taking advantage of time decay and changes in implied volatility.

Diagonal spread

Here, you purchase and sell options contracts on the same security with different strike prices and expiration dates, seeking to take advantage of changes in implied volatility and time decay.

Vertical spread

The purchase and sale of options contracts on a same security with the same expiration date but different strike prices, with the aim of profiting from changes in the price of the underlying security.

Collar

A combination of a protective put option and a covered call option on the same security, limiting both potential gains and losses while generating income from option premiums.

Ratio spread

The purchase and sale of multiple option contracts on the same security at different strike prices, with the aim of profiting from changes in the price of the underlying security while managing risk.

For example, you may pay a £6 premium for a net profit of £14.

Selling cash-backed puts

This involves the sale of put options on a security while retaining sufficient cash to cover the potential purchase of the security if assigned, thereby generating income from option premiums.

Selling naked calls or puts

This is when you write call or put options without owning the underlying security or having the cash to cover potential liabilities, which increases potential gains but also carries significant risk.

Investing in asset-backed securities

This is the purchase of securities backed by a pool of underlying assets, such as mortgages, car loans or credit card receivables, with a view to realising the cash flows generated by these assets.

Investing in mortgage-backed securities

The purchase of securities backed by a pool of residential or commercial mortgages, with the aim of making money from the cash flows generated by the mortgage payments.

Investing in tax debts

This is the purchase of tax liens on properties with unpaid taxes, which allows for the collection of interest on the lien or the acquisition of the property if the owner fails to pay the taxes.

Investing in capital-investment

This involves investing in private companies through direct investments, buyouts or other transactions.

Capital-risk investing

Here, the idea is to provide funding to early stage, high potential companies in exchange for equity, with the aim of achieving significant returns if the company is successful.

Angel investing

Individual investors such as yourself provide capital to start-ups or early stage companies in exchange for equity or debt, with the aim of profiting from the company's growth and eventual exit.

Investing in cryptocurrencies

This involves buying and holding digital currencies, such as Bitcoins, Ethereum or other digital coins, in order to profit from price appreciation or to use them in transactions.

Initial coin offerings (ICO)

Here, you invest in new cryptocurrency projects by purchasing tokens in the initial fundraising phase, in the hope that the tokens will increase in value.

Security token offerings (STO)

This is investing in tokens representing ownership of underlying assets, such as real estate or shares in a company, with the aim of profiting from asset appreciation or income generation.

Investing in utility tokens

This involves the purchase of tokens giving access to a specific platform, product or service, with the aim of profiting from the increased demand and appreciation of the tokens.

Crowdfunding investments

Here, the idea is to provide capital to start-ups or projects through online platforms, potentially receiving shares, debt or other rewards in exchange for your investment.

Peer-to-peer lending

This is when you lend money directly to individuals or businesses via online platforms, earning interest on loans and diversifying risk across multiple borrowers.

Direct share purchase plans (DSPP)

This involves buying shares of a company directly from the company, often without going through a broker and with lower fees, and in some cases you can even purchase fractional shares.

Direct re-investment plans (DRIP)

DRIPs are the automatic reinvestment of dividends received from a security in additional shares of the same security, resulting in compounded returns over time.

Leveraged investments

This is the use of borrowed funds or financial instruments, such as spreads or options, to increase exposure to an investment and its potential returns, although it also increases your risk.

Investing in inverted ETFs

When you invest in exchange-traded funds that are designed to move in the opposite direction of their underlying index, with the aim of making money thanks to market declines.

Harvesting tax losses

In a nutshell, this is selling losing investments to offset capital gains tax, which can improve portfolio returns while maintaining a consistent investment strategy.

Tactical trading

This involves an active adjustment of your portfolio positions in response to short-term market trends, indicators or events, with the aim of taking advantage of opportunities or reducing risk.

Mezzanine financing

This is when you provide subordinated debt or preferred equity to companies, often with higher interest rates or potential conversion to equity, in exchange for higher returns and risk.

Asset allocation funds

Here, you invest in a diversified mix of asset classes, such as stocks, bonds and cash, often in order to meet your specific risk profile or investment objectives.

Target date funds

These are mutual funds that automatically adjust their asset allocation over time, becoming more conservative as the retirement date approaches.

Lifecycle funds

Mutual funds that aim to provide a diversified, age-appropriate investment strategy by automatically adjusting asset allocation according to your age or your risk tolerance.

Investing in infrastructures

You guessed it: investing in physical assets that provide essential services, such as transport, energy or utilities, with the aim of generating income and long-term capital appreciation.

Investing in royalty trusts

This is the purchase of shares in a trust that holds and manages royalty interests in natural resources, such as oil, gas or minerals, with the aim of profiting from the income generated by these resources.

Master limited partnerships (MLP)

The idea here is to Invest in publicly traded partnerships that operate primarily in the energy sector, providing you with a potential for tax benefits, income and capital appreciation.

Long term equity anticipation securities (LEAPS)

When you purchase long-term option contracts, often with expiry dates between one and three years, with the aim of profiting from long-term price movements with lower time decay.

Investing in inflation-protected securities

This involves buying government-issued bonds, such as Treasury Inflation-Protected Securities (TIPS), which adjust their principal and interest payments in line with inflation, in order to preserve purchasing power.

Investing in special situations

Here, you focus on unique opportunities created by corporate events or situations, like spin-offs, top management changes or restructurings, in order to take advantage of mispriced securities.

Unit-linked investment funds (UIT)

The idea here is to invest in a fixed portfolio of securities held for a predetermined period of time, with the aim of generating income, capital appreciation, or both.

Investing in closed-end funds

The purchase of shares in a closed-end investment fund, which is traded on an exchange and has a fixed number of shares, with the aim of taking advantage of the fund's underlying investments and potential discounts to the net asset value.

Investing in open-ended funds

When you invest in mutual funds that issue and redeem shares on demand, with the net asset value of the fund calculated daily, in order to benefit from professional management and diversification.

Investing in tangible assets

This is the allocation of capital to tangible assets, such as real estate, commodities, infrastructure or natural resources, with the aim of preserving capital, generating income or hedging against inflation.

Investing in short-term bonds

The goal here is to focus on bonds with shorter maturities, usually under five years, with the aim of providing income and reducing interest rate risk compared to long-term bonds.

Investing in long-term bonds

Investing in bonds with longer maturities, often over 10 years, to generate higher income and potentially greater capital appreciation, but with higher interest rate risk.

Investing in "investment-grade" bonds

This is when you buy bonds issued by companies or governments with high credit ratings, with the aim of generating income with relatively low credit risk.

Investing in high-yield bonds

When you purchase bonds issued by companies with lower credit ratings, often called junk bonds, with the aim of generating higher income but with a way higher credit risk.

Investing in municipal bonds

This is investing in debt securities issued by either state or local governments, often offering tax-free interest income and relatively low credit risk.

Investing in zero-coupon bonds

The purchase of bonds that don't pay periodic interest but are sold at a deep discount to their face value, with the aim of making money from the difference between the purchase price and the face value at maturity.

Investing in laddered bonds

Here, you add bonds with staggered maturities to your portfolio, with the aim of reducing interest rate risk and generating a regular income stream.

Investing in annuities

This consists of a purchase of an insurance product that provides a guaranteed income stream during retirement, either immediately or at a later date, in return for an initial premium or a series of premiums.

Beta-smart investments

The use of a rules-based approach to construct a portfolio that combines active and passive investment elements, and aims to outperform traditional market-cap weighted indices while managing risk.

Systematic investment strategies

Below you will find investment strategies that tend to be more "systematic" in nature than the previous ones:

Factor investing

Here, you focus on specific factors, such as value, growth, momentum or quality, which have historically demonstrated their ability to generate excess returns.

Momentum trading

Buying stocks with strong price or earnings momentum, with the hope that the trend will continue.

Dollar cost averaging

Investing a fixed amount at regular intervals, regardless of market conditions, to reduce the impact of market volatility.

Quantitative analysis

Using math and statistical models to analyse financial data and identify investment opportunities.

High frequency trading

This type of trading exploits minute price differences or market inefficiencies, often using very low latency connections and holding positions for milliseconds.

Algorithmic trading

This is when you automate the trading process using predefined rules and algorithms to execute your trades, often based on technical analysis or quantitative models.

Arbitrage

This involves exploiting price differences between related assets or markets, by buying in one market and selling simultaneously in another, usually with minimal risk.

Statistical arbitrage

The use of quantitative models and historical price data to identify and exploit short-term market price inefficiencies.

Dynamic asset allocation

This is the continuous adjustment of your asset allocation according to market conditions, economic indicators or changes in your financial situation.

Market making

This is when you provide liquidity to financial markets by simultaneously quoting the buying and selling prices of securities, taking advantage of the spread between buying and selling prices.

Commodity Trading Advisors (CTA)

Here, you invest in futures contracts on different asset classes, often using systematic trading strategies to capitalise on market trends or inefficiencies.

Conclusion

Discretionary investment strategies rely on human judgement - your judgement - and subjective analysis, offering greater flexibility but potentially less consistency.

Systematic investment strategies, on the other hand, follow a rules-based approach that is more objective, consistent and repeatable, but may be less adaptable to changing market conditions.

The choice between these strategies depends on your objectives, risk tolerance and investment philosophy.

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