Traders Union
/
Investing Glossary
/
Quantitative Trading Definition And Key Characteristics

Quantitative Trading Definition And Key Characteristics

Updated: May 02, 2024

Upendra Goswami

Contributor

Reviewed by

Dr. BJ Johnson

Editor

Fact-checked by

Mirjan Hipolito

Cryptocurrency and stock expert

Expert verified

Key Characteristics of Quantitative Trading

At its core, quantitative trading involves the following key characteristics:

Data-Driven Precision
At the heart of quantitative trading is an unwavering commitment to data. Traders meticulously collect, analyze, and interpret vast amounts of historical and real-time market data, encompassing price movements, trading volumes, economic indicators, and other relevant factors.
Algorithmic Precision
Once patterns and insights emerge from the data, quant traders employ sophisticated algorithms to translate findings into actionable trading strategies. These algorithms, often developed using complex mathematical models and statistical techniques, automate trade execution, ensuring precision and speed in response to market movements.
Systematic Methodology
Quantitative trading adheres to a rigorous and disciplined approach, eliminating emotional biases that can cloud human judgment. The systematic nature ensures consistency and objectivity in decision-making, reducing the risk of impulsive or erroneous trades.
Backtesting and Optimization
It undergoes a rigorous backtesting process before deploying a quantitative trading strategy in real-time. It involves simulating the strategy's performance using historical data to assess its effectiveness and identify areas for improvement. Optimization techniques are then applied to refine the strategy, maximizing its potential for success.

👍 Pros of Quantitative Trading

Quantitative trading offers several distinct advantages over traditional trading methods:

• Disciplined Precision
A primary advantage of quantitative trading lies in its precision and discipline. The reliance on data, algorithms, and systematic processes eliminates emotional decision-making, promoting a disciplined and consistent trading strategy.

• Velocity and Efficiency
Quantitative trading is renowned for its swiftness and efficiency in executing trades. With algorithms handling trade execution, transactions unfold swiftly and precisely, capitalizing on real-time market opportunities.

• Diversified Portfolios
Quantitative trading allows for diversified portfolios. Traders can concurrently apply strategies to various assets and markets, spreading risk and potentially enhancing returns through a well-balanced portfolio.

• Insights Anchored in Data
Quantitative trading yields insights rooted in data. By scrutinizing historical and real-time data, traders can unveil patterns, trends, Forex Market Trend Definition And Examples

To learn about algorithmic trading strategies, their key components, and benefits, we recommend reading this article: Top Algo Trading Strategies

👎 Cons of Quantitative Trading

Despite its advantages, quantitative trading also presents certain challenges:

• Reliance on Historical Data
Market dynamics evolve, and past performance might not accurately predict future outcomes. Prudent traders exercise caution to avoid excessive dependence on historical data for decision-making.

• High Computational Requirements and Infrastructure Costs
Implementing quantitative trading strategies necessitates substantial computational power and infrastructure. Acquiring and maintaining such resources can be a hurdle for some traders.

• High Skill Requirements
Quantitative trading demands a high proficiency in mathematics, statistics, and programming. Traders must possess advanced skills to craft and implement effective algorithms, making it a formidable field for those lacking a robust quantitative background.

• Technical Errors and Model Failures
Despite algorithmic precision, technical glitches and model setbacks can transpire. This inherent technology reliance risk mandates traders to address and mitigate such issues promptly.

• Lack of Human Oversight
Quantitative trading operates with minimal human oversight, a potential drawback during swiftly changing market conditions. A human touch proves valuable in adapting to unforeseen events and adjusting strategies accordingly.

Best Forex brokers

9.4/10

Go to broker

eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest.

Minimum deposit:

$50, $100 (for UK clients)

Bonus for deposit:

Regulation:

CySEC, FCA, ASIC

Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA. eToro Profile Details

Pros/Cons

•the minimum transaction amount for copying is $1;

•handy functionality for passive investing;

•regulated by independent monitors;

•it is possible to purchase contracts for fractional shares (that is, to invest amounts less than the cost of one share);

•it is possible to buy shares at once (not CFDs) on the US stock exchanges.

•high spreads;

•periodic technical failures in order execution;

•lack of the most popular platforms such as MetaTrader 4 and MetaTrader 5 in Europe and the CIS;

•no access to ECN systems, orders are processed only according to the STP (straight-through processing) scheme with access to specific liquidity providers;

•there is a commission for withdrawing funds;

•impolite support staff;

•inconvenient website.

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

No minimum

Bonus for deposit:

Regulation:

FSC (BVI), ASIC, IIROC, FCA, CFTC, NFA

Review

The name OANDA is an acronym for “Olsen & Associates” or “Olsen AND Associates”. It is registered in the United States and provides its clients with a wide range of financial services in most countries of the world. The company was founded in 1996 and is currently regulated in four jurisdictions. The main regulator of the broker is the UK Financial Conduct Authority (FCA). Oanda Canada is licensed by IIROC. The company has several significant awards to its credit, including a victory in the category "Best Forex Trading Technologies" from the UK Forex Awards, "Best Trading Platform" from FX Week, as well as "Best Customer Service" from the US Foreign Exchange Report.

Pros/Cons

•Minimum deposit from 1 dollar.

•A large selection of the most popular trading instruments.

•Several reliable and reputable financial regulators.

•Inconvenient and poorly functioning site.

•Lack of cent accounts.

•Lack of bonus programs.

Conclusion

Quantitative traders use various tools and approaches such as technical indicator analysis, fundamental data analysis and machine learning to identify trading opportunities based on mathematical models and statistical analysis.

Quantitative trading does not guarantee profits and is better suited for large capital management by hedge funds. Retail traders may find it difficult to apply quantitative trading as it is demanding on the raw data, analyst qualifications and the software used.

Glossary for novice traders

1 Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
2 Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
3 Quantitative Trading
Quantitative trading consists of trading strategies based on quantitative analysis, which rely on mathematical computations and number crunching to identify trading opportunities.
4 Backtesting
Backtesting is the process of testing a trading strategy on historical data. It allows you to evaluate the strategy's performance in the past and identify its potential risks and benefits.
5 Forex Trading
Forex trading, short for foreign exchange trading, is the practice of buying and selling currencies in the global foreign exchange market with the aim of profiting from fluctuations in exchange rates. Traders speculate on whether one currency will rise or fall in value relative to another currency and make trading decisions accordingly.

Team that worked on the article

Upendra Goswami

Contributor

Upendra Goswami is a full-time digital content creator, marketer, and active investor. As a creator, he loves writing about online trading, blockchain, cryptocurrency, and stock trading.

Dr. BJ Johnson

Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.