Is Quantitative Trading Good for You?
Traders use many mathematical models to plot trading moves, and quantitative trading analysis is one of the more successful ones.
If you’re just new to stock trading, you could be turning away from complex mathematics calculations just because they’re too confusing to understand and figure out. These mathematical models, however, are sometimes essential as you progress further into trading and investing. These are part of continuing trading education. Quantitative analysis is one such advanced and useful means for plotting trading moves and identifying opportunities, and makes use of mathematical models. Let’s cut the confusion and explain the situation in simple terms.
Getting to the Basics of Quantitative Trading
Quantitative trading involves trading strategies formed on the basis on quantitative analysis. The common data inputs for the mathematical models used in quantitative analysis are price and volume. More than individual traders, hedge funds and financial institutions are the ones that usually employ quantitative trading. They have large transactions, with the shares and securities they buy and sell amounting to hundreds of thousands. But the trend is changing now and we are seeing individual investors using more of quantitative trading.
Mathematics combines with modern technology and comprehensive databases for quantitative traders to make decisions. They select a trading method and then make a model of it with the help of mathematics. They then create a computer program for applying that trading technique model to the historical market data that’s available. If the results end up being positive or favorable, the traders implement the system in real-time trading. So it’s basically predicting how a particular trading technique would probably work for a particular market situation, on the basis of historic data. If it is found to work well, then it’s implemented.
An Analogy from Weather Forecasting
Investopedia compares quantitative trading models to weather forecasts. If a weather report involves the meteorologist forecasting a 90% possibility of rain, even with the sun shining, the prediction is based on the analysis of climate data from the sensors in the area. Computerized quantitative analysis is used to reveal specific patters in that climate data. These patterns then get compared to similar patterns while backtesting, which is basically analyzing historical data. If similar patterns have resulted in rain 90 times out of 100, the conclusion is drawn that there is 90% forecast of rain though it may be a perfectly sunny day. That’s the process applied by quantitative traders too. They come to the conclusion on the basis of patterns in historical market data.
Quantitative Analysis Can Guide You to the Right Decisions
So even if it may involve complicated calculations and all, quantitative trading should be a good thing for plotting trading moves, right? Well, yes. Stock trading is all about ensuring the moves you make end up being profitable. Data helps predict, with a certain level of accuracy, whether the moves to be could end up being successful. But with too much data to deal with, traders would find monitoring and analyzing trading decisions quite overwhelming. Quantitative analysis makes this process easier, through computers, for automating the monitoring and analysis of historic trading patterns and present trading decisions to be made.
This objective and empirical data analysis also leaves emotion out of trading decisions. Often, traders end up making wrong decisions because, even if data and rational thinking object to the decision, emotions get the better of them. That causes losses. But with computerized models and analysis, emotions get thrown out the window. Quantitative analysis is therefore good for you.
But you need to ensure that the quantitative trading models you develop are dynamic and adaptable to the changing market situation. Financial markets are ever changing. So there’s no point in only developing models that could be profitable temporarily but would fail when the market situations change.
Upon deciding on the model that is right for your trading style, it is also important to select a broker that will not only allow you take advantage of your long and short strategies, but also will keep costs down. TradeZero does all of that while also providing 6:1 intraday leverage.