Quantitative trading is an area of quantitative finance that is highly sophisticated. This article introduces some of the basics of a quantitative trading system and the necessary background to become a qualified quantitative trader.
What is Quantitative Trading?
Quantitative trading or quant trading is a type of trading that uses quantitative analysis as the basic strategy to identify trading profit possibility, including mathematical calculations. The most common data inputs in the quantitative analysis are price and volume.
Transactions involved in quant trading are usually large, which includes the sale and purchase of hundred or even thousands of shares and securities. This is because quantitative trading is typically practiced in the financial institutions.
The four primary components of a quantitative trading system include:
- Strategy identification
- Backtesting strategy
- Execution system
- Risk management
What Does a Quant Trader do?
Quantitative traders, also known as quants, utilize modern technology, comprehensive databases, numbers and mathematics to derive a logical trading decision. Using mathematical models, quantitative traders then identify trading opportunities.
Quant traders research the available price and data from the enormous amount of data in algorithm trading and high-frequency trading, find profitable trading opportunities, create relevant strategies, and grab the opportunity faster with the help of computer programs.
Generally, quant traders need an in-depth understanding and knowledge of mathematics, possess computer skills, and have some exposure to trading.
Technical Background of a Quant Trader
To become a full-fledged quant trader, one needs to have the following professional background:
- Great with numbers: Quant traders must be excellent with numbers and quantitative analysis. An in-depth understanding of mathematics is required to carry out trading activities such as data researching, results testing, development, and implementation of trade strategies.
- Educated in a relevant course and training: Studies involving theoretical concepts and the introduction to quantitative trading provide a better background for quant traders. This may include a master’s degree or a diploma involving financial engineering, quantitative financial modeling, or any course with electives in quantitative.
- Armed with unique trading strategies: Quant traders should have in-depth knowledge about common trading strategies and have the ability to develop their unique trading strategy.
- Possess programming skills: Quant traders should know at least one programming language such as Python, Java, C++, or Perl. They also need to have knowledge about automated trading, data mining, analysis, and research, which are usually involved in algorithmic trading and high-frequency trading.
- Familiar with the computers: Quant traders need to be familiar with analysis software, spreadsheets, and broker trading. Also, they should be able to develop their algorithms on real-time data.
Soft Skills of a Quant Trader
Besides the above-mentioned technical skills, quant traders need to possess the following soft skills:
- The spirit of a trader: Successful traders will brainstorm innovative trading ideas, can take on a massive volume of data, quickly adapt to the ever-changing trading market and can work on extended hours.
- Able to take risks: Quant traders are risk-takers that understand the impact of risk, its management, and mitigation techniques.
- Accept failure: Although the developed strategy may seem foolproof, failure is sometimes inevitable. Quant traders must always be ready to accept defeat, willing to let go of their concepts and develop a new one.
Becoming a quant trader may seem complicated, and it requires a lot of hard work. However, the lucrative income and innovative system of quantitative trading make quant trader an excellent career choice.
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