Quantitative Trading – Introduction
High Frequency Trading (HFT) has continued to increase in the last few years. In fact, old hedge funds which previously focused on traditional methods of trading are now establishing their own quantitative trading divisions. This is because most of the trading occurring today is done through quantitative robots. One of the leading hedge funds in the market is Citadel which is run by Ken Griffin. On a daily basis, the transactional arm of the hedge fund transacts more than $1 billion a few minutes after the market opens. Another influential hedge fund managers in this industry is James Simmons who runs a hedge fund called Renaissance Technologies. These hedge funds have only a few employees who mostly are not financial professionals. They are either mathematicians or computer scientists whose work is to create algorithms to execute trades. In this article, I will highlight five reasons why I believe that quantitative trading is the future of trading and why you should learn it.
#1 – Barriers Removed
In the past, to create your own robot, you needed to have a background in computer science or in software development. This is because one needed to take time and develop the code which will execute trades. This prevented most people from developing these applications because not many financial professionals have experience in coding. Today, most online brokers have developed platforms to help people with no coding experience to develop their robots. They have drag and drop tools and instructions which enables them to create robots within minutes.
#2 – Knowledgebase Available
In the past, to learn about quantitative trading, one needed to go to school and learn about coding. This was a major barrier to entry because many people saw no need for this training. Today, traders have access to information on how to create trading bots. This information is available in various quant trading tutorials and videos which guide people on how to develop these codes. There are also many online videos that guide people to develop the robots. In the past, this information was not available.
#3 – The Big Thing Now
As mentioned in the introduction, most hedge funds are now turning to automated trading. Most hedge funds are now experiencing a period of low growth and increased outflows. On the other hand, automated hedge funds such as Betterment are experiencing a period of growth. Therefore, as the trend and the returns continues to grow, chances are that most people will focus on this new trend.
#4 – A Simple Process
Before you start practicing algorithmic trading, chances are that you feel that it is a difficult process. However, as you become more acquainted to the system, you will realize that it’s a simple process. Once you have mastered the art and science of combining various indicators you will have a better time trading. Remember that the key to successful algo trading is to create a good system and backtest it for a period of time. If you prove without any reasonable doubt that your system is good, then you will have an easy process of trading.
#5 – It Works
The last reason why algorithmic trading is the future is that it is an accurate method. The best way to look at this is to compare hedge funds that use the systems and compare it with those that don’t. In the 2008 financial crisis, while most hedge funds closed shop, James Simmon’s firm reported its best year s far with an 80% return. The fund has also never had any negative years. This means that when well-executed, algorithmic trading works. The key is to develop a good system and then backtest for a good period of time.
Quantitative Trading – Useful Links
- Discover more about Quantitative trading on Investopedia
- Read more on Quantitative trading on Quantstart