8 Pros And Cons of Quant Trading: Definition and Exploration
Quant trading has both pros and cons. In this article, we look at 8 pros and cons of quant trading. Even though we list both 8 pros and cons of quant trading, we believe the pros far outweigh the cons. The main reason for that is that you actually backtest an idea or hypothesis and at the same time reduce behavioral mistakes.
Trading, an abbreviation for quantified- and quantitative trading, is growing in popularity because of the possibility of having the computer do all the work and thus reduce emotions and behavioral mistakes. Quant trading was previously only available for big trading firms, but today this is a viable option for most retail traders. We believe most retail traders stand a better chance if they use the systematic approach that quant trading offers.
(Before we go on we’d like to mention that we have a backtesting course that covers all aspects of how to backtest.)
What is quant trading?
Trading is challenging and needs to be treated as a profession. It is difficult to find profitable systems, and yet another hurdle is overcoming behavioral mistakes. Emotions, biases, greed, and fear are just a few of the issues you have to address. Trading is all about making decisions about an uncertain future.
Fortunately, you can dramatically reduce human errors with the advent of technology such as VPS (a virtual private server), software, coding, and programming.
Quant is an abbreviation for quantitative or quantified – pick your definition – and is sometimes referred to as algo trading. Quant trading, also called algo or algorithmic trading, involves making 100% testable systems run alone on a trading platform without human interference. The systems can, for example, run on your VPS where you start the systems and portfolios before trading hours and stop them after trading hours.
Quant trading lets you focus on developing quantitative trading systems and portfolios while all the trading and execution run automatically on their own. This way, you reduce the possibilities of human errors drastically. Furthermore, it gives you time to pursue other things, perhaps even having a separate source of income.
Related reading: 8 Quantitative Trading Strategies
How does quantitative trading work?
An algorithm has predefined rules for buy and sell signals and scans the market at preset intervals, often with some seconds “rest” between each scan, so your computer or VPS doesn’t get overloaded, depending on how many strategies you are running.
You can develop strategies by testing various hypotheses, or you can let your computer look for potential inefficiencies while you are sleeping. The latter is more and more common, but it involves rigorous out-of-sample testing.
As a quant trader, you can never rest on your laurels. Trading requires constant work to make sure you have a plan B (and replace strategies when they stop working).
What steps are required for quant trading?
The following bullet points need to be done to develop a quantitative trading strategy:
- First, you need to formulate a plan or hypothesis. The strategy might be mean-reversion, momentum, trend-following, or perhaps a day trade.
- When you have an idea, you must be able to formulate the design down t