Stock trading is possibly the only field on earth that is too old and yet forever young.
Its market is for the dreamers. If you can dream big, the chances are high that you can make it big.
Every day, traders are trying their luck in predicting stock price movements. While some emerge victoriously, others succumb to the pressure.
To beat the markets, you have to scan various strategies and filter out the one that can comfortably generate healthy returns, irrespective of the market’s direction.
In essence, you need a technique that is both robust and simple.
One such strategy is Quant Trading.
Read this article to discover the untold secrets of Quant trading and how you can leverage it to get gravity-defying returns from the stock market.
Quant Trading – A Primer
Quantitative trading, popularly known as Quant trading, evolved with the modern concept of stock trading.
Previously, the stock market was floor-based, where traders would assemble every morning and shout at the top of their voice. On the floor, buyers found sellers, and sellers found buyers.
A trader’s role was to negotiate with the buyer or seller of a stock and make a profit in the process. With time, all of that changed.
Presently, the stock market is a digital marketplace. Orders get placed online, and shares have transformed from physical to digital.
The transformation of the stock market led to large-scale data availability, making it easier for informed traders to sift through it and find a pattern. They are now exploring advanced concepts like data mining, algorithmic trading, high-frequency trading, arbitrage, and so on.
As educated people with a degree in economics, finance, business, or computer science started entering the markets, the markets entered a new era – the era of the Quant traders.
Quant traders belong to the more sophisticated, intelligent, and professional breed of traders, who believe in simplifying complex data and making predictions easier.
On a typical day, you would find a Quant trader immersed in mathematical models, juggling numbers and financial reports, willing to make the complicated art of trading simpler and more predictable.
Quant Trading – How to Rise and Shine
There are specific pre-requisites to becoming a Quant trader. Here is a sneak-peek into the things you need to excel in this art.
Quant trading not only requires you to have expertise in finance and mathematics but also have mastery over these subjects. It helps to have an MBA, CFA, or PhD degree in some quantitative stream. Alternatively, you may also become a Quant trader if you have a vast amount of experience in testing various strategies and know the market inside out.
Besides qualification, you may require the following skills:
- Excellent knowledge about computers
- Understand a few programming languages
- Knowledge about automation
- Expert knowledge of data mining and data feeds
- Ability to take risks
- Be open to learning new strategies
Now that you know the skills you need to excel as a Quant trader let’s explore how you can leverage it to shore up cash.
The Top Ways to Leverage Quant Trading
Quantitative Trading is Different From Algorithmic Trading
In its simplest form, the quantitative analysis does something similar to algorithmic trading. Both Algo and Quant trading depends on data to make recommendations. Both use statistical formulae and mix it with computer programming to increase accuracy.
For example, you may witness a sudden jump in the volumes of a particular stock and see that the volume spike also causes an increase in the price. You may use this knowledge to create a program that automatically tests historical data. If it finds that the formula succeeded many times in the past, it will predict that the same formula will succeed in the future.
While the fundamental premise of both Algo and Quant trading are similar, what they do individually is quite different. Algo trading automatically identifies chart patterns and executes buy or sell orders. Quant trading, on the other hand, identifies opportunities and recommends the best buy or sell price; however, it may or may not execute a trade on its own.
As a Quant trader, you need to follow four distinct steps to discover an opportunity. They are:
- Designing a strategy
- Testing the strategy on historical data
- Executing and testing its success rate in the live market
- Creating a time-tested risk management strategy
Once you are sure about the strategy’s success rate, you can declare to the world that you have found your ‘Eureka’ moment.
Some Strategies of Quant Trading
Although there are more strategies than the number of Quant traders in the market, some techniques find more foothold than others.
Here are some of the most popular Quant trading strategies that traders employ:
- Mean Reversion – This strategy is based on the premise that any stock would return to its long-standing mean when it deviates too much from the level. If the deviation is on the north side, the Quant trader will initiate a short trade and vice versa.
- Momentum Trading – Perhaps the most popular of all Quant trading strategies, momentum trading identifies the probability of a wave and finds an opportunity to ride it.
- Algorithmic Pattern Recognition – This is an advanced technique that allows traders to precede an institutional buyer and go where they are going.
- Behavioral Bias Recognition – This strategy anticipates the crowd behavior and formulates a method that can encash the fear and greed behavior of the crowd.
- ETF Rule Trading – This strategy is based on the principle that when new stock is added to an index, the stock price will go up due to mandatory institutional buying.
As a Quant trader, you can get more opportunities to make profits if you have a knack for statistics and keen knowledge of the stock market. Generally, well-meaning Quant traders are hired by large financial institutions, where they collaborate with other price-action and technical analysts and create models that intend to generate healthy returns for their clients.
If you are a beginner in the world of Quant trading, Quantopian can be your first step to achieving mastery. After all, a Quant trader never misses an opportunity to learn, whether novice or experienced.
But before entering the market as a Quant trader, remember that you shouldn’t fear losing, at least in the initial days. Hence, it is better to stake a little and focus on execution, not capital appreciation. Once you pick up the tricks of the trade, nothing can stop your capital from defying gravity.