Many people think complex trading strategies as a starting point when discussing quantitative trading, and inadvertently put a layer of mystery on quantitative trading. In this section, we will try to make a simple “sketch” for quantitative trading in an easy-to-understand language, revealing his mystery, and I believe that even a beginner can easily understand.
Subjective trading pay more attention to artificial analysis and sense of market price. Even if there is a trading signal, they will selectively place orders, preferring to miss the trading chances and not doing anything wrong. The human feeling is complex and unreliable, and most traders often switch to another method in the event of a continuous loss, which comes with strong randomness, easy to be plagued by profit and loss, making it difficult to stabilize profits.
Quantitative trading develop a consistent trading strategy through an understanding of the trading. In the trading, all the trends are treated equally, and all the open positions are systematically processed. It is better to do something wrong than to miss it. It also has a complete evaluation system, through historical data backtesting, to determine which type of market and variety is more suitable for the strategy, and to achieve profitability with a variety of strategies and varieties.
In short, subjective trading are the basis for quantitative trading and quantitative trading are the refinement of subjective trading. Subjective trading are more like martial arts. In the end, success or not, talents account for the majority, some people spend their whole life still can’t success. Quantitative trading is more like fitness. As long as you work hard, you can train your muscles even if you don’t have the talent.
A successful subjective trader, in some way, is also a quantitative trader. Because a successful subjective trader, there must be a set of rules and methods of its own, that is, the trading system. Successful subjective trading must be based on trading discipline and trading rules, and the execution of trading rules is actually a quantitative part of subjective trading.
On the contrary, a successful quantitative trader must also be an excellent subjective trader, because the development of quantitative trading strategies is actually the crystallization of one’s trading philosophy. If a cognition and understanding of the market is wrong from the beginning, then the developed trading strategy has long been difficult to profit.
Therefore, from a profit perspective, the key factor in determining whether a trader will ultimately succeed is the trading philosophy, not whether it is a subjective trading or a quantitative trading. Quantitative trading seem to be superficial on the surface, and the essence of their profits is not essentially different from subjective trading They are like the two-sided opposition and unity of one thing.
But there is no denying that quantitative trading does have many advantages from trading instruments.
• Backtesting is faster. To test a trading strategy, you need to calculate a large amount of historical data, and the quantitative trading can calculate the result within a few minutes. This speed is many times faster than subjective trading
• It is more scientific, evaluating whether a strategy is excellent, relying on data (eg, Sharpe ratio, maximum retracement rate, annualized income) rather than self-explanatory talks.
• More opportunities, there are thousands of trading varieties around the world, subjective trading can not focus on them all at the same time, but quantitative trading can be market-wide focusing all time, never miss any trading opportunities, increase profitability.
It depends, it is a very difficult thing to stick to it for a long time. Making money or not does not depend on the quantitative trading itself. It is only a tool. Quantitative trading only implements the trading ideas in a programmatic, regular, and quantitative manner. The procedure replaces only the execution power. The hard part is to make money in a long-term and stable way, because the market is game-changing and dynamic, and the trading ideas must follow the market transformation.
Quantitative trading is also risky, why? Because quantitative trading is to mine the rules in historical data, form a trading strategy. But the financial market is an ecological system. Its law and humanity are an interactive dynamic process. In the final analysis, it is the human market. The laws of the market will be affected by human nature, and the greed and fear between human beings will change with the changes of the market. There are few unchanging laws in the market, and even the most powerful trading strategies are difficult to cope with such sudden changes.
Through the above explanation, we can see that quantitative trading is not a unique trading method, it is just a trading tool that helps us analyze trading logic and improve trading strategies. Whether you are a value believer or a technical analysis believer, whether you are doing stocks, bonds, commodities or options, you can actually quantitative them. Quantitative trading’s weapons in the hands of traders are market evidence and rationality. It has a hugh advantage compared to traders who make decisions based on personal experience.
Quantitative trading is only a trading method. The trading strategy is only the carrier of trading ideas, and the program executes each trading process. The next section will take you through the complete life cycle of quantitative trading, which will include: strategy design, model building, backtesting tuning, simulation trading, real market trading, strategy running monitoring, etc.