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What is the process to develop a quantitative trading strategy?

AI-trading vs algo-trading

What is a Quantitative Trading Strategy?

Quantitative trading strategies are very important in identifying market trends and help traders maximize their profits. Quantitative trading strategies are meant to identify trading opportunities by relying on quantitative analysis and mathematical models. Price and volume are the two common inputs used for building a quantitative trading strategy. There are many different types of quantitative trading strategies such as high-frequency trading (HFT), algorithmic trading, statistical arbitrage, etc. Many of these strategies focus on the short term market movements with more active trading. Building quantitative trading strategies are continuing to grow amongst everyday investors compared to predominantly companies at first.

 How do you Develop a Quantitative Trading Strategy?

Developing a quantitative trading strategy is a very thorough process that requires immense research and mathematical models. It requires a strong understanding of the markets, but you will also have to research and perform statistical analysis as well. You will need to research everything from selecting which securities you want to invest in, choosing and filtering the data, and then studying the data for a given security to predict future markets once you start trading. 

First, you should research what kind of strategy you want based on your portfolio and desired trading frequency. Your strategy should account for when to buy vs sell and at what quantities. It is also important to note that sometimes you will want to adjust the quantities up or down as the markets change. Lastly, it is extremely important that a quantitative trading strategy notes when to to exit a trade. While emotions can sometimes cloud our judgement, refrain from lowering your stop-loss point, and stick to your trading plan as much as possible. 

Once you have your strategy, it is important to precisely test the strategy using historical data and alter the strategy based on the results to optimize profits. This is a very important step in the process to developing a quantitative trading strategy as testing is what allows us to validate our strategies. When testing, you need to ensure that all possible market scenarios are accounted for. Some of these include bull markets, bear markets, or market bottoms. Accounting for multiple market trends allows you to be satisfied that your model can handle future market changes as they come.

Now it is time to execute our trades while trying to minimize the transaction costs as much as possible. In this step we should also think about the risk factor, and how much we are willing to risk in our trades. Again, think about what risk-reward ratio works best for you.

How will my Quantitative Trading Strategy work with Future Market Trends?

It is important to actively check back on your trades to ensure that you are staying as profitable as desired. It is always a good idea to continue testing your strategy and updating as you go. The markets are continuously changing, so what works now probably will not work in the future. At some point you will have to adjust or create a new strategy to maximize your profits. I hope this helps you with getting started on developing a quantitative trading strategy!

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