algorithmic trading / technical analysis / momentum
Technical Analysis Indicators Explained: Mean Reversion vs Momentum
Course walkthrough
Algorithmic Trading Fundamentals
All lessons in this series
- 1What is Algorithmic Trading? A Beginner's Guide to Automated Strategies
- 2What is a Trading Indicator? The Building Blocks of Algorithmic Trading
- 3Technical Analysis Indicators Explained: Mean Reversion vs Momentum
- 4What Are Fundamental Indicators? Understanding a Company's Financial Health
- 5Alternative Data Sources for Trading: Satellite Imagery, Sentiment Analysis & More
- 6From Indicators to Conditions: Building Your Trading Rules
- 7What is a Trading Condition? Turning Indicators into True/False Logic
- 8What Are Trading Actions? The Final Building Block of Algo Trading
- 9What is a Trading Strategy? Indicators + Conditions + Actions
- 10How to Know if Your Trading Strategy is Actually Good?
- 11What is Backtesting? How to Test Your Trading Strategy
- 12What is Trading Strategy Optimization? (And How to Avoid Overfitting)
- 13Recap: From Building Blocks to Deployment
- 14How to Deploy a Trading Strategy: Paper Trading to Live Trading
- 15How to Backtest a Trading Strategy on NexusTrade (Beginner Guide)
Technical indicators analyze historical price movement to predict what might happen next. But there's a catch: stock market returns are non-stationary, meaning the past doesn't always repeat.
In this video, I break down two opposing approaches: → Mean Reversion: Stocks tend to return to their average price (SMA, EMA, Bollinger Bands) → Momentum: Stocks moving in a direction tend to keep moving that way (RSI, MACD)
Understanding these concepts is essential for building trading strategies that actually make sense.
Watch lessons, complete hands-on activities, pass quizzes—and by the end, you'll have a real strategy deployed to the market.
Transcript
0:00Let's first talk about technical analysis indicators.
0:04These indicators depend on a stock's price and the history of stock movement, and it operates under the key assumption that what happened in the past is likely to happen in the future.
0:20Now, this is very important: stock market returns are non-stationary. So, what does that mean?
0:27It means that you cannot always rely on what has happened before because stock market returns change over time.
0:37However, by studying these different patterns that happened, you can get insights on what tends to happen in the market. As for some of the indicators, there are many different types.
0:51We're gonna focus on two opposing ideas. Number one is the idea of mean reversion.
0:59What this says is that stocks tend to have a certain price. It tends to operate around its average price, and if the stock is too far away from its average price, it is likely to revert closer to the mean.
1:19That's why we call this mean reversion.
1:23These indicators include rules like simple moving average, exponential moving average, and even Bollinger Bands can be used to capture mean reverting price movements.
1:36The second type of technical indicators are what's called momentum indicators, and this has the opposite idea.
1:46If a stock is moving in a certain direction, it is likely to continue moving in that direction.
1:55Some examples of this indicator are Relative Strength Index, or RSI, and Moving Average Convergence Divergence, or MACD.
2:06There are other types of technical indicators too, like average true range of a stock's price, and even using arithmetic to combine indicators together.
2:17But all technical indicators do one key thing: they try to examine historical price movement and predict what might happen next based on what has happened in the past.
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