Quantitative Trading 101 – Strategies:
What is Quantitative Trading – Introduction:
Quantitative Trading, or Algorithmic Trading, is the use of data in computer algorithms to create Financial models to analyze, trade and forecast financial markets.
When we think of Quantitative Trading we may imagine a buch of Mathematicians creating complex formulas to solve a financial problem such as risk management. Others may imagine Data scientists applying machine learning to create black box models. Is this affirmation correct?
Well, it depends.
The term quantitative trading is very wide, and we can classify here a lot of working methods to trade the markets, since basic strategies and inefficiencies based on price, time and volume, like the ones i teach in my introductory Algorithmic Trading course, others can be based on some basic Statiscal concepts like Cointegration, Machine Learning or advanced math.
Some of them will be very complex and other may be more simpler than you think.
Let me start with a simple example:
“It turns out that when it’s cloudy in Paris, the French market is less likely to go up than when it’s sunny in Paris,” he said. Ultimately that trade did not make a lot of money because data showed it to be sunny a little more than half of the time. “The point is that,” Brown concludes “if there were signals that made a lot of sense that were very strong, they would have long ago been traded out.” – Forbes Magazine
A simple model from Renaissance Technologies, probably one of the best Quantitative Trading funds in the world about a simple model. Since the information has been declassified, we know that it does not have much relevance, but it gives us to understand what kind of data they use.
Not all models have to be hard to understand as we can see. And thanks to the standarized use of computers, and programming, anyone can make and try models from home.
Quantitative Trading Strategies:
Trading a spread means to trade the ratio or difference between to financial products or assets. When we are trading, let’s say, a stock. We are valuating this stock against a currency. For example: JP Morgan / US Dollar.
When we are trading a spread, we are valuating and asset against other. For example: JP Morgan / Goldman Sachs or Crude Oil / Brent Oil. This way, we are trying to eliminate some risks associated to the underlying market, commodity or sector.
In this example we can see the ratio between Crude Oil and Brent Oil, and while Crude Oil/USD went into negative prices implying a very high risk and volatility, in this case the ratio’s volatility was lower and with less risk since we are valuating Crude Oil against Brent Oil instead of USD.
Then, we can apply this for almost every correlated assets. Banking stocks are great for this, and this way we can create a neutral delta (neutral trend) portfolio.
Now i’m going to set an example where i have made a complete portfolio based to this methodology. Given the fact that most retail traders lose money over time, and, that most of their positions are public, we can extract good data thanks to it.
Back in the day i made this script to extract data from Myfxbook, for automation this was even more simple, since you can use an API to trade with some brokers like Oanda.
In fact, i made a whole software about this, which is very used in the Spanish Community, i signed it with the name of my Spanish web page SagaQuant. You can download the software here. Have in mind that you’ll need to have Java instaled on your computer in order for this software to work.
Cointegration – Pairs Trading:
This video will teach you anything that you need to know about it.
A few personal notes about Quantitative Trading:
Quantitative Trading can be very hard at first, everything will seem new to you and complicated. Start slow and easy, try first classic strategies and models, you will be surprised about the performance of some of the 80’s classics. Quantitative Trading firms can’t trade these models since their trading volume is way too high, you can.
You can trade basic inefficiencies with four or five futures contracts, they use to trade with hundreds of contracts. The same applies to the Forex market.
Don’t rush things, start with some simple books, search on Amazon the more popular ones, do your researchs on the Internet.
Hope this can help you, Víctor – Follow the edge.