Quantitative Trading & Investing – Risk Management

All investment strategies are have some risk and quantitative trading is no different. There are several risks when it comes to quantitative trading. These include the issues and concerns we have raised in our previous articles. Risks can arise at various stages of trading from strategy identification to its final execution. In addition to that, there may be many unforeseen risks such as a major technology malfunction in the exchange or even a brokerage going bust, in the worst possible scenario!

When it comes to risk management, we can only tell you that there are numerous books and other resources available on the internet that can teach you how to use methods such as the optimum allocation of capital, through various quantitative trading strategies. Since this is only an introductory article on quantitative trading, let us not digress into branches of what is called portfolio theory in the technical parlance.

Instead, let’s talk a little about the risks that can arise from the psychological profile of the trader. There are several times when the psychological makeup of the trader can impact the implementation of his strategies. These are called cognitive biases. For example, there is a bias that can come from loss aversion. This is a scenario in which may refuse to close out a long position because the pain of realising a loss is just too much for the trader.

Quantitative Trading & Investing

On the other end of the spectrum, there might be a potential risk to a strategy if a trader is in a hurry to book profits. This may arise from his fear of losing h

is earlier profits. The other common problem is what is called the “recency bias” where a trader tends to have a short term view because of some events that have taken place in the marketplace and is not taking into consideration the long term implications of the same. To top it all, there are the constants of fear and greed that are the two things that have ruled the bourses from times unknown. This can result in severe over or under leveraging that can have disastrous results.

So that’s that about risk management. As these articles have exemplified, quantitative investing is a complex but an extremely engaging and interesting component of finance. We have only given you a bird’s eye overview of the same and it goes in without saying that adequate preparation is needed if you want to become a retail trader or find employment with a private equity firm or hedge fund. Knowledge is really the key of mastering the area of quantitative finance, and we cannot reiterate enough the necessity to gain the right kind of knowledge to even think of venturing into this space.

To begin with you not only need to have a good knowledge of mathematics and economics but must als
o be good at programming to achieve success in the field. If you are armed with the right knowledge and have the capital in hand, don’t be discouraged by a few teething problems to begin with. If you keep at it, with of course the right kind of expertise and approach, the sky is indeed the limit where quantitative trading is concerned.

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