﻿ Quantitative trading : what is it, Work, Factors, Benefits, FAQ | POEMS

The father of quantitative  analysis is Harry Markowitz, one of the first to use mathematical models in financial markets. Quantitative trading is a strategy used by institutional investors and hedge funds, but it is slowly making its way into the vocabulary of everyday retail investors. Quantitative traders use cutting-edge tools, mathematical models, and readily accessible comprehensive data to make informed trading judgments.

Quantitative trading is a market strategy that uses statistical and mathematical models to find opportunities and frequently act on them. The name of the strategy comes from the fact that quantitative analysis drives the models. It is sometimes referred to as “quant” or “quant trading.”

Research and measurement are used in quantitative analysis to reduce complicated behavioural patterns to numerical values. It disregards qualitative analysis, which assesses opportunities based on arbitrary elements like management talent or brand power.

Due to the high computing demands of quant trading, only large institutional investors and hedge funds have historically used it. However, in recent years, new technology has also made it possible for a growing number of independent traders to participate.

## How does quantitative trading work?

Quantitative trading relies heavily on data and calculates the likelihood of various outcomes using statistical and mathematical models. It conducts extensive investigations and develops conclusive ideas using numerical data sets.

This is why elite financial institutions and high-net-worth individuals have dominated the quantitative trading industry for a long time. Yet, ordinary investors are now using it more frequently.

Hedge funds and financial organisations use quantitative trading because of their huge transactions, which might involve purchasing and selling thousands of securities and shares. Nonetheless, private investors have been resorting to quantitative trading recently.

Programing languages are used by investors who engage in quantitative trading to harvest historical stock market data from the web. In a procedure known as the beta-testing of quantitative models, the historical data is used as input for mathematical models.

Any quantitative trading system has four key components:

• The research entails selecting a trading strategy and assessing its compatibility with other trader strategies, which is the first step in the quantitative trading process.
• Strategy back-testing aims to determine whether the strategy chosen in the first step is profitable when applied to historical and out-of-sample data. Positive back-testing outcomes gauge how the strategy will function in real-world situations but does not ensure success.
• The execution system is the process by which a broker executes a list of deals that the strategy generates. Either all or a portion of the execution process may be automated. The primary elements to consider while building an execution system are the interface to the brokerage, decreased transaction costs, and performance divergence between the live system and the back-tested performance.
• Quantitative trading involves several hazards, such as technological risks and brokerage risks.

## Pros and cons of quantitative trading

The pros of employing these methods of quantitative trading are:

• This style of trading seeks to determine the likelihood of a successful trade.
• It allows for efficient stock monitoring, analysis, and trading decisions.
• By analysing and making lucrative trading decisions using computer algorithms, quantitative approaches improve efficient trading judgments.
• The emotions of fear and greed are eliminated, and rational decision-making is encouraged rather than relying on hunches or chance.

The following are some of the quantitative trading strategy’s cons:

• Due to the erratic nature of the financial markets, algorithmic models must constantly change.
• Most quantitative models are lucrative only for the specific market type or circumstance to which they are applied. As a result, the experts must update them when market conditions change.

Quantitative trading algorithms can be modified to assess various aspects of a stock depending on the trader’s analysis and preferences. Think about a trader who practises momentum investing. They can decide to create straightforward software that selects the winners when the markets are moving upward.

The software will purchase those equities when the market recovers the next time. This quantitative trading example is quite straightforward. Normally, a complicated mix of stocks intended to maximise profits is chosen using various criteria, including technical analysis, value stocks, and fundamental analysis. An automated trading system is configured with these criteria to profit from changes in the market.

Both algorithmic and quantitative trading use computers to automate the trading process. Still, they take quite different approaches regarding the forms of trading instruments they use and how they are used.

In quantitative trading, market patterns are predicted using mathematical and statistical models. In algorithmic trading, deals are automatically entered based on pre-established rules to profit from market swings.

Quantitative traders, or quants for short, find trading opportunities and purchase and sell stocks using mathematical models. They use quantitative and mathematical approaches to assess financial products or markets.

A degree in maths, financial modelling or engineering is generally required by companies hiring quants. They’ll be looking for expertise in automated systems development and data mining. All of these skills and a working knowledge of mathematical ideas like kurtosis, value at risk and conditional probability are necessary if you want to try quant trading.

Price and volume are the two variables that quantitative traders most frequently look at. Yet, a strategy can consider any variable that can be reduced to a numerical value. For instance, some traders might create tools to track investor opinions on social media.

Quant traders may develop and inform their statistical models using several freely accessible databases. Alternative datasets are explored to find trends outside of conventional financial sources like fundamentals.

Quantitative trading entails using trading strategies, referred to as quantitative trading strategies, that are based on quantitative analysis and that find trading opportunities using calculations and data crunching.

Although individual retail traders are starting to use quantitative trading more frequently, hedge funds and financial institutions still employ it quite often.

The benefit of quantitative trading is that it enables the best possible use of the facts at hand and does away with the potential for irrational trading decisions.

Decisions made by traders who employ a quantitative approach are only based on facts and figures. This can reduce the potential for emotional trading decision-making, resulting in more profitable deals.

## Category

### Read the Latest Market Journal

#### Weekly Updates 27/5/24 – 31/5/24

Published on May 27, 2024 45

This weekly update is designed to help you stay informed and relate economic and company...

#### Unlocking Stock Market Potential with AI

Published on May 24, 2024 80

Introduction of AI In the world we live in today, artificial intelligence (AI) is almost...

#### Financial Sectors Thriving: Top Traded Counters in April 2024

Published on May 21, 2024 94

At a glance: The Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%...

#### One Dollar at a Time: The Potential of Fractional Shares

Published on May 20, 2024 93

#### Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

Published on May 20, 2024 92

Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly...

#### Weekly Updates 20/5/24 – 24/5/24

Published on May 20, 2024 22

This weekly update is designed to help you stay informed and relate economic and company...

#### What is CFD? With 2 Practical Examples

Published on May 15, 2024 109

In this article, you will learn what CFD (Contract for Difference) is, the costs and...

#### What is ESG investing, and why is it important?

Published on May 15, 2024 121

Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

×
POEMS 3 App

• Call Back

• Chat with us

Need Assistance? Share your Details and we’ll get back to you

IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101
Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com