Simply put, it is an investment strategy that uses mathematical algorithms and technology-based logical computations. They are typically used by fund managers, private equity firms and wealthy individuals. But recently small retail traders have been taking advantage of the stock market using such methods and are converting these tactics into complete automated trading systems.
The purpose of this article is to serve as an introduction to essentially two categories of people, those who are trying to make a career as a quantitative trader and for the individual retail traders who are trying to understand the basic concepts of quantitative trading and have limited capital for trading.
If you are aware of these basic concepts, and you are good with numbers you will find that this is a fascinating area that can offer an excellent career opportunity as this sector of the market grows. However, let us not over simplify things here. It will serve you well to know that quantitative trading is indeed a branch of finance that is rather sophisticated.
One must venture into this space knowing that it can take several months to construct even the most basic strategies. Quantitative trading is converting your thoughts and trading styles into a rule base trading system a computer can executre, this is not an easy task. You must also know that to get involved with quantitative trading systems you will require some expertise in programming. If you do not have extensive programming knowledge, you must at least have the knowledge in computer languages such as R, Python or MATLAB. But, it is important for us to mention that the technological aspects will emerge more clearly as the frequency of trading increases. It is therefore of great importance that you be familiar with CC++ before you think of starting to use quantitative trading systems.
Four Major Pillars of Quantitative Trading Systems
• Strategy Identification – This involves finding a suitable strategy, exploiting an edge and select a frequency of trading that you are comfortable with.
• Strategy Back Testing – In this step, one has to first obtain the relevant data, next analyze the performance of the strategy. This has to be done by removing all biases.
• Execution System – This step involves linking your said strategy to a brokerage. This can be done by automating the order process. This in turn will also help you minimize the costs of transaction.
• Risk Management – This is perhaps the most critical aspect of trading systems. This includes capital allocation optimally and deciding upon one’s “position size”. If you do not understand position sizing and risk management then you will struggle with building your won trading system.
Not that long ago technical analysis was not considered a skill or profession. With more sophisticated trading tools now available, quantitative trading is gaining traction with individual retail traders and all traders should spend some time learning about it as it is the way of the future for trading stocks, options and futures.