What is quantitative trading? In-depth analysis of quantitative trading

May 11, 2022

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Recently, the word “quantitative trading” has been heard more and more frequently. Most people’s first impression of quantitative trading is “high technology”, “artificial intelligence stock trading software”, “a combine harvester for institutions to harvest retail investors”, “lying An artifact to make money”… However, have you really thought about what quantitative trading is and what can it help us do? It is necessary to first understand the concept of “quantitative trading” and know whether “quantitative trading” can bring us what we want.

1. What is quantitative trading

What is quantitative trading? To be precise, quantitative trading belongs to an application branch of artificial intelligence. It uses the powerful computing power of computers and uses mathematical models to imitate human thinking to make decisions. From the historical data analysis of bonds and futures, a trading strategy with high probability of profit is obtained. This is a bit official, and it’s a bit confusing to read. In fact, it is simply how to manage the probability of winning and losing and help us make accurate decisions. Just like playing Texas Hold’em, when you have a good chance of winning, you follow up. Otherwise, fold and choose not to play when there is no chance of winning. The probability of winning when playing cards is constantly calculated in our brains, and in quantitative trading, more advanced means such as computers, mathematical modeling, and programming are used, in order to obtain the probability of winning efficiently and quickly, and make decisions accordingly.

It can also be said that Buffett and Munger are, to some extent, human flesh-based quantitative trading machines. Buffett has always emphasized that the most important thing in investing is to be rational and not let emotions affect your investment decisions. Munger emphasized that investment judgment should be made in the form of a “list”. These are similar principles to quantitative trading. When you have not yet developed the skills of rational judgment like Buffett and Munger, understanding the principles of quantitative trading can effectively help you improve the rationality of your current investment strategy. Using quantitative trading to speculate in stocks is actually using the thinking of those who build stock strategies in Stocks.

2. Characteristics of quantitative trading

What are the advantages of quantitative trading compared to traditional trading? Traditional trading, whether it is technical analysis or fundamental analysis, belongs to qualitative analysis. Qualitative analysis, in layman’s terms, refers to human thinking to make decisions. This highly abstract model has absolute advantages in depth. Quantitative trading is a kind of quantitative analysis. The so-called quantitative analysis is the strategy of obtaining a specific profit probability and selecting a trading strategy according to the probability. Because the powerful computing power of the computer is used, it occupies an absolute position in the breadth. Advantage.

We can compare quantitative trading and traditional trading to Western medicine and traditional Chinese medicine. Traditional investment trading relies on subjective experience judgment and cannot give specific parameters and indicators. Quantitative trading, like Western medicine, relies on instruments, equipment, and software. The phenomenon is converted into reference data to provide a basis for patient treatment. Combining quantitative trading with traditional trading, abstracting the human thinking model into a mathematical model, and applying it to quantitative trading as a trading strategy, this is the most ideal situation, which not only loses the depth of analysis, but also ensures the breadth of analysis. It is said that it has both fish and bear’s paw, which can be regarded as complementary characteristics of the two.

Another advantage of quantitative trading is that it can give us enough self-confidence to help us overcome the weaknesses of human nature such as greed, fear, and ego.

Yingshou Ai quantitative trading automatic stock trading robot:

1: It has very proficient technology. Whether you can program or not, and whether you have a good stock selection idea, you can use our quantitative trading stock trading robot. The robot has 180 semi-finished quantitative models, and the historical return test rate is very high. , The firm’s annualized return is higher, outperforming the broader market and 99% of shareholders

2: It has plenty of time and tireless work for many years. It only takes a few seconds to automatically search and scan the whole market in the data of more than 4,000 stocks according to the design of the quantitative model, and conduct automatic trading according to the settings.

3: It can truly achieve a rational, stable and strict long-term automatic operation set by the model, and overcome the greed and fear of human nature

3. The essence of quantitative trading

The essence of quantitative trading can be summed up in this quote from Simmons:

“No matter how complex the model is, no one can make money for a long time, because the market is changing and the information is changing. We are not slaves of the machine. Only through continuous learning, we can continuously update our models and strategies to find the market. Only by keeping our trading system up to date with the change itself can we remain invincible in the trading market.”

Since the market is changing and information is changing, the past does not represent the future. Does it make sense to test with historical data? Also, why is the trading strategy far inferior to the historical simulation results in real trading?

For the answer to the first question, an example related to the college entrance examination can be given. Before the college entrance examination, schools will regularly organize mock tests to evaluate students’ abilities. Although the final college entrance examination questions are different from the mock tests, the level of students’ performance in the mock test is basically the same as that in the college entrance examination. Therefore, testing with historical data is to use past experience as a reference guide, and to discover repeatable patterns that contain profit opportunities through interpretation of the past.

For the second question, the difference between historical test results and actual results is mainly caused by these factors:

Random effects: the results of historical tests may be a phenomenon of randomness

Optimization paradox: choosing specific parameters reduces the value of post hoc testing

Overfitting: The fit with historical data is too high, and slight changes in market behavior result in worsening performance

In general, it is very important to “adjust at any time and respond reasonably”

4. Summary

Before we officially started to learn the content of quantitative trading, we spared no time in analyzing the concept of quantitative trading from various dimensions such as the concept of quantitative trading, the characteristics of quantitative trading, and the nature of quantitative trading. The purpose is to let everyone understand quantitative trading correctly. We can’t be too mythical about it, and we can’t dismiss it because we don’t understand it, just as the Industrial Revolution replaced humans with machines.

Quantitative trading is essentially a tool that helps us manage trading odds efficiently and quickly, and is an application branch of artificial intelligence. It is not so inscrutable. The most important thing is still the trader’s thinking, that is, the strategy model of the quantitative trading system. For the subjective trading god who can maintain long-term profit, quantitative trading can help him make more money, while a People who can’t make money from subjective trading use quantitative trading, that is, using the thinking of the trading god to speculate in stocks, so that their accuracy and income will have a qualitative leap.