What is quantitative trading and other questions
Quantitative trading is basically a trading based on data and data models as opposed to biased and random opinions based trading. Data can also be biased, of course, but applying the law of large numbers and proper processes, biases are usually minimized, and consequentially we can arrive at more truthful answers than having only an opinion.
For example, if programmed system says that situation sin’t good, we would buy less of the stocks if ever, and vice versa. Or the system says that to buy Microsoft is better than Apple, then we will buy Microsoft, not Apple. This can go exceptionally complex, because despite the fact that all trading ideas are only of two types, with other parts of the strategy, strategies and multiple models they are basically limited only by trader’s imagination.
Quantitative analysis is like traffic lights: when we have red, we do nothing, with yellow we buy less and with green — we buy in full. It may sound like some sort of technical “analysis” indicator, and we can call TA as “naive quantitative trading”, but it has huge difference — quantitative “lights” should be tested knowing the laws of statistics.
In quantitative trading we rely only on emotionless data and quantitative analysis, which, using mathematics, statistics and probability theory can derive some hidden “truths” about the market that can be further explored or outright trading opportunities.
Without predictive data, we are basically trading randomly, often influenced by our emotional biases, like we tend to buy what we love or what goes “to the moon”, and miss big market moves, because we lost in previous cycle. Basically, average trader does not necessarily what is optimal for him.
The goal of quantitative trading doesn’t differ from defined goals of trading and investing: it is to crunch numeric data trying to identify profitable trading opportunities and minimize risks. But how you would define goal of trading and investing rationally, if you didn’t knew what probability distribution, mentioned in the above article, is? You will define goals as if you’ve read anywhere else, like, “buy low, sell high”, “make profit”, “manage risk”. Those sayings, without knowing exactly what is that “low”, and what is that “high”, and what is that “manage risk”, are meaningless.Without numeric data, trader is basically wandering in the dark tunnel.
Quantitative trades execution (one of uantitative trading strategy components) is usually automated to also minimize human factor risk of second-guessing signals, trades, weights, etc.
Why quantitative trading? Main reason of using quantitative trading is to make rational decisions by overcoming emotions or not overwhelming our brain with too much of data (or constant work).
