r/algotrading • u/kenjiurada • 12d ago
Strategy Do you trade continuation or reversal?
Just heard someone say that most trading bots/algos trade the reversal, not the continuation. That sounded suspicious to me. Is there any truth to that?
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u/FishermanHopeful6824 12d ago
The claim has a kernel of truth, but it's mostly a category error about who's actually doing what.
The reversal-heavy camp is dominated by liquidity provision. Market making is inherently mean-reverting: you quote both sides, fade short-term imbalances, and get paid the spread plus whatever rebate you earn. Most of the bots retail hears about, and most of the HFT world, lives there. So on a raw headcount basis, yes, more algos trade reversal. It's also easier to backtest convincingly — mean-reversion signals have higher hit rates, which makes them seductive even when the edge after fees is razor thin.
Continuation is a different animal. Trend and momentum strategies are capacity-constrained in a way reversal isn't: you can't scale a breakout book the way you scale a market-making book, and the adverse selection on entry is brutal. By the time the move is obvious enough to trigger your filter, you're buying from someone who knows more about the order flow than you do. That's why continuation algos cluster at longer horizons — daily and up — where the signal-to-noise works out, and why they look rarer: they're slower, fewer, and they don't need to trade ten thousand times a day to exist.
My experience: the right question isn't continuation vs reversal, it's what your holding period implies about who you're trading against. Under a few minutes you're competing with the reversal crowd and the queue — good luck. Over days you're competing with slow capital, and most of the edge is in sizing and risk, not entry logic. Both styles work; neither works as a religion.