What is quantitative trading about?

Pavel Hála | Quantitative trading | 3. 6. 2015

What does quantitative trading actually mean? First, I must point out that this designation conceals many trading techniques on various types of assets using different trading frequencies. The unifying element (according to me) is the use of data mining methods, i.e. bulk data processing using custom algorithms, subsequent visualization (plotting), or searching for patterns and dependencies in the data and their utilization in building a trading system.

If this description is evoking in you an automated trading system, you’re only partially correct. A quantitative approach does not have to lead to automated strategies. After processing and visualization of data, you can use conclusions from your analysis as only one of the factors leading to a decision whether to enter the trade or not. Another wrong assumption is that quantitative traders focus exclusively on short-term intraday trades, i.e. those that open and close within one day. For example, I’m not doing intraday trading at all. I primarily trade option strategies, where I hold positions for several weeks or even months.

How can we define the quantitative approach? In my opinion, you can consider yourself a quant trader when you do your own data analysis beyond the tools that are available to you in your trading platform or available software. For example, you notice that the price of a stock you’re watching is influenced by some fundamental indicator and you can’t investigate this dependency using available software. By doing a quantitative analysis, you download historical price data for your stock plus historical data for the indicator. Then you plot the data in a chart, construct a histogram, find the statistical distribution of the dependent variable, etc. It is not important whether you perform your analysis the lengthy way in Excel, or simply write down your own script. It’s essential that you develop some extra effort and get information that is not apparent at first sight. This way you get a competitive advantage over other traders who rely solely on a trading platform or available software. You can detect an opportunity for profit earlier than others, or can avoid losing trades.