What is Quantitative Trading?
Quantitative trading is a type of trading that uses quantitative analysis and mathematical models to analyse the change in price and volume of securities in the stock market. Mathematical models and computation are used to collect and analyse data on investment opportunities.
As quantitative trading is generally used by financial institutions and hedge funds, the transactions are usually large and may involve the purchase and sale of millions of shares and other securities. However, quantitative trading is becoming more commonly used by individual investors.
Depending on the trader’s research and preferences, quantitative trading algorithms can be customized to evaluate different parameters related to a stocks. Consider the case of a trader who believes in price action. They can choose to write a simple program that picks out the winners during an upward price momentum in the markets. During the next market upturn, the program will buy those stocks.
This is a fairly simple example of quantitative trading. Typically, a collection of parameters, like technical analysis & fundamental analysis, is used to pick out a complex mix of stocks and then our designed into an algorithm to maximize profits. These parameters are programmed into a trading system to take advantage of market movements.
Components of a Successful Quantitative Trading Model –
The 3 main components are Finance, Mathematics and Programming. Finance gives us the trading idea, mathematics helps us quantify the opportunity, and programming helps us test and implement the trading strategies.
Understanding finance, economics and how the market works is the most important part of quantitative trading. This gives us the skills to identify and find trading opportunities. In many cases, having knowledge of other specific domains is useful if we are trading products in those industries.
For example, understanding the demand and supply process is useful if you are trading FMCG companies.
For most trading ideas, you just need high school level statistics. This knowledge is necessary to calculate how big or small an opportunity is, and to calculate how big your trades should be. Let’s say a trade wins’ 50% of the time with a 15% return, loses 40% of the time with a 10% loss and loses 10% of the time with a 100% loss. Is this a good opportunity? If yes, how much should we trade?
Programming will help you test, improve and deploy your quantitative trading strategy. Programming is usually the last piece of the puzzle after the initial strategy design phase. However, it is increasingly important as new strategies require technical skills at the onset. You must be able to program the strategies as required by the script.
Quantitative Trading Systems:
Quant traders develop systems to identify new opportunities – and often, to execute them as well. While every system is unique, they usually contain the same components:
Advantages Quantitative Trading: –
The use of quantitative trading techniques automates tasks that were manually completed by investors. It saves time and energy of the investor which was before used in effectively monitoring, analysing and making decisions.
Emotion is another important aspect that hinders the ability of traders. It can either be greed or fear when trading. Emotions serve only to choke rational thinking, which generally leads to losses. Mathematical models and computers do not encounter such a problem, so quantitative trading eliminates the problem of “emotion-based trading.”
Disadvantages Quantitative Trading: –
As the financial markets are very dynamic, we can never say that that the markets environment will stay the same. That is why quantitative trading fails to be fully automated as it must be changed with the passage of time and the market’s mood.
Why To Use Quantitative Trading?
One can use quantitative trading to:
Collect large amount of data (web scraping)
Fire a trade with lightning quick reactions
Fire many trades in a short time
Fire a trade where you need a precise price
Monitor the markets 24/5 or 24/7
Analyse large amounts of data
Analyse data quickly
Analyse text or images (using machine learning)
Correct most of the time
Gives scope of back-testing
Important FAQs: –
Do quant traders always make profit?
As it is important to possess a certain level of mathematical skill, training, and knowledge, quant traders are often in demand on Wall St. Indeed, many quants have advanced degrees in fields like applied statistics, computer science, or mathematical modelling. As a result, successful quants can earn a great deal of profits, especially if they are employed by a successful hedge fund or trading firm.
Who is a quant trader?
These traders use mathematical models and large data sets to identify trading opportunities to buy and sell securities.
How Can I Become A Quant Trader?
An aspiring quant trader needs to be skilled and interested in all things related to his subject. A bachelor’s degree in math, a master’s degree in financial engineering or quantitative financial modelling, or an MBA are all helpful for scoring a job; many analysts will also have a Ph.D. in these or similar fields. In addition to an advanced degree, a quant should also have experience and familiarity with data mining, research methods, statistical analysis, and automated trading systems.