Quantitative trading strategies are on the rise. As the market becomes more high tech, we find human traders being replaced by computer programs that use incredibly sophisticated algorithms to conduct hands free automated trading. Because computer programs can collect and analyse financial data much more quickly than people, and accurately, the impact has been to change the overall look of the market.
There are many advantages to the use of quantitative trading strategies. Automated futures trading lowers trading costs, and increases market liquidity. It also more accurately reflects the value of commodities such as stocks.
An alpha generation platform is a technology solution used in quantitative trading to develop trading strategies that generate consistent alpha, or absolute returns. These strategies can be simple or complex, but they all take volume and price into consideration. Using this data, they track different scenarios in order to make trades.
The main mathematical formulas used in quantitative trading strategies are momentum trading and mean reversion
In momentum trading, the mathematical model looks at historical data in order to find a pattern, and then compares this to the current price. The aim is to find stocks that are moving significantly in one direction, under the assumption that the trend will continue. Mean reversion trading looks to find the average mean price for a particular stock, and buy the stock when it is below that average on the assumption that the price will return to the average.
For a human trader, it is almost impossible to keep track of thousands of stocks current and historical price data. For computers, this kind of trading is ideal. It can process large amounts of data, quickly, and, using algorithmic trading techniques, execute a large number of order at high speed. In general, high frequency traders earn more profit than traders with slower execution — since for the slower traders, by the time the rising trend or deviation from the statistical mean is noticed, the advantage is already gone.
Quantitative trading strategies utilise sophisticated and highly advanced computer programs. Quantitative developers, people with expertise in math, computer programming, and statistical analysis are key to developing accurate and profitable mathematical models. The other key to making quantitative trading strategies that work is to ensure your are using accurate and clean data. Computer analysis is only as good as the data being analysed, so it is essential to expend resources on sanity checking and cleaning up your data feeds.
As computer programs become more sophisticated, we will see more and more high-frequency trading taking place in the market. Developing quantitative trading strategies is essential for remaining profitable.