What is Quantitative trading?

Quantitative Analysis involves using mathematical and statistical models, to track the changes in the price and volume of any stock. Quantitative trading is trades based on such analytical models. It is an analysis made by investors to find suitable investment opportunities. Earlier, this method was primarily used by financial institutions like investment management firms, hedge funds, and institutional investors, while trading on huge volumes of securities. However, in recent times, individual investors have been using quantitative trading methods to analyse their own portfolios. Using these models an investor speculates on the future prices of a security. Similar models are used for quantitative forex trading as well. In this method, the rise or decline in a foreign currency is speculated.

Components of Quantitative trading

  • Price and volume are essential components of quantitative trading. These are the easiest attributes to plot on a chart and thus, possible to analyse easily.
  • Techniques like statistical arbitrage and more are utilised for short-term investments.
  • Tools like moving averages are helpful for the creation of a computerised trading system.
  • Backtesting is another component that helps a trader evaluate the historical trend based on the same analysis and then analyse the result to decide whether the strategy will be effective for the upcoming trade opportunity.
  • Managing risk is another key aspect of a Quantitative analysis system.

Advantages of Quantitative trading

Quantitative trading is employed to identify a profitable trade. The advantages of using computer algorithms are as follows:

  • Quantitative trading facilitates faster decision-making and quicker execution compared to manual computation.
  • Using mathematical models, its goal is to avoid losses based on emotions and other aspects.
  • The decision-making is more accurate and data-backed, which helps a trader to be more confident about their trades and profitability.

Disadvantages of Quantitative trading

Successful implementation of a quantitative trading strategy is not an easy task. Because of the dynamic nature of the stock market, things go unnoticed. A few disadvantages of quantitative trading are:

  • Mathematical models fail to keep up with continuous changes in the stock market.
  • Profitability analysis made by the quantitative trading method may work only in the short term.

Effective quantitative trading strategies

There are four quantitative trading strategies:

  • Strategy Identification

    In the first stage of quantitative trading, investors must identify and select a trading strategy that best suits the investment portfolio.

  • Strategy backtesting

    This step tests the profitability of the strategy selected in the first step. This gives a clearer picture of whether the strategy is actually a profitable one. An investor must proceed with the strategy only if the backtesting results are positive.

  • Execution System

    A profitable strategy is executed based on the strategies selected and tested in the previous steps. While creating an execution system, an investor and broker must consider ways to reduce costs and conduct trade seamlessly.

  • Risk Management

    Trading involves various risk factors. Even with quantitative analysis in trading, risks cannot be fully avoided. The different risks associated with quantitative trading include brokerage risk, defective technology and more. However, with improving technology and more sophisticated algorithms for trading, quantitative analysis tools are trying to reduce risks while trading.

Examples of Quantitative trading

For example, an investor uses quantitative trading to decide the stocks he wants to invest in. The algorithmic or quantitative trading system scans multiple variables such as volume, gains, momentum, and more. The stock with the highest-rated variables is chosen by the investor.


Financial markets are dynamic, as they have multiple components involved. Quantitative analysis in trading gives investors an insight into the opportunities available in the market and the ways to make use of them. Quantitative forex trading is also used with the objective to make short-term speculations. However one needs to be careful of the pitfalls of using quantitative trading tools as well. Due to the high volatility of the stock market, successful trading is not always possible.

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