Programming lets you test, improve and deploy your quantitative trading strategy. Go read about Expected Value and Kelly Criterion (this formula is aggressive, use with care to prevent overbetting).Īlternatively, we can run simulations to find the optimal betting size based on multiple potential outcomes of a trade. There is a statistical solutions for the two questions above. Is this a good opportunity? If yes, how much should we trade? Let’s say a trade wins 50% of the time with a 15% return, loses 40% of the time with a 10% loss and loses 10% of the time with a 100% loss. You need statistics knowledge to calculate how big or small an opportunity is, and to calculate how big your trades should be. In many cases, having knowledge of other specific domains is useful if we are trading products in those industries.įor example, understanding the weather and agriculture process is useful if you are trading coffee futures.įor most trading ideas, you just need high school level statistics. This gives us the skills to identify and find trading opportunities. Understanding finance, economics and how the market works is the most important part of quantitative trading. Finance gives us the trading idea, mathematics helps us quantify the opportunity, and programming helps us test and implement the trading strategies. What are the Key Components of Quantitative Trading?įinance, mathematics and programming. This allows us to predict the timber company’s earnings. Sending someone to record the number of trucks leaving a timber processing factory every day.Winklevoss Twins (the twins that sued Facebook’s CEO Mark Zuckerberg) became billionaires thanks to a $11 million bet on bitcoin in 2013.Hedge fund manager George Soros profiting $1 billion betting that the UK was unable to maintain the British Pound above a certain value in 1992.In contrast, here are some examples of manual trading strategies. What are som e examples of Manual Trading Strategies? We buy or short this stock in hopes that its behaviour will revert back to normal. Today, one of the stock moves in an unusual fashion. A group of similar stocks from the same country and industry usually move together.Fire a trade quickly (using machines) before the market can react to a piece of news.We buy or short asset B when we see asset A move. What are som e examples of Quantitative Trading Strategies? Fire a trade where you need a precise price.Fire a trade with lightning quick reactions.Collect large amount of data (web scraping).Analyse text or images (using machine learning).We use quantitative trading because we want to: We use manual trading when the market opportunity is one-off. We use quantitative trading when the market opportunity is persistent, which means it appears over and over in a similar fashion. When should we use Quantitative Trading? (Instead of Manual Trading) If the price doesn’t rise, we buy the stock in hopes that it does (especially during the next quarterly earnings announcement). If Y doesn’t happen, we do Z in anticipation that Y will happen.įor instance, if satellite images of all Walmarts show an increase in the number of parked cars (which implies an increase in shoppers), the price of Walmart should rise. The difference from manual trading is that either the decision making process is done quantitatively or trade execution is done automatically by a machine. The point of quantitative trading is to long or short a financial asset when its price is not what (we think) it should be. The best way to learning quantitative trading is to join a trading firm or find a mentor and shadow him at work. It is done to exploit persistent market opportunities to make profits. What is quantitative trading? Quantitative trading is the buying and selling financial assets using computers, without human intervention.
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