What are quants in trading?

Quant derives from quantitative, which is about quantifying through math using numbers. A quantitative analyst is a trader who uses math for their trading decisions like signals for entries and exits along with position sizing. Quant traders analyze large amounts of historical market data with complex models using math and statistics to design profitable trading systems.

Quantitative trader uses strategies that rely on mathematical computations to identify trading opportunities that create a statistical edge. This can be based on a good risk/reward ratio or a high win rate. A quant will create a trading system with a positive expectancy model based on math.

Quant traders use quantitative strategies than can involve simple math or more complex statistical models run by computer trading algorithms to identify positive opportunities, which can be executed manually or automatically using programmed algorithms.

Quant trading can be programmed using algorithmic software for automatic trade execution in the market. However a quant strategy traded with an algo is just a programmed system and another participant in the market. It’s edge comes from the math the system is based on as well as the speed of its execution. Note that quant algos don’t win on every trade and can even be turned off during market environments that don’t favor its programmed edge.

A quant trader can also be someone that uses a pure mechanical trading system that has been backtested and quantified with a watchlist, signals, and position sizing parameters.

The components of a quant trading system are the following:

  • Formulate a trading theory for how the market works.
  • Backtest the strategy hypothesis.
  • Identifying a strategy that works.
  • Quantify the entry and exit dynamics.
  • Create a trading plan for the execution method
  • Set risk management parameters for position sizing, correlations, and max risk exposure.
  • Forward test results.
  • Observe results for maintaining its edge.

Note that a quant strategy is only as good as the work put into developing it and considering all factors involved. The market is always evolving and changing along with the nature of trends, volatility, and volume. An edge can diminish over time but the principles of math are what stay the same. While quant trading theoretically removes the emotional weaknesses of a human trader don’t underestimate how difficult it can be for a trader to follow a mechanical trading system through losses and drawdowns with real capital. A quant trader must have faith in the math to follow a quant strategy over the long term with discipline.

From 2009-2010, over 60% of U.S. trading was attributed to HFT quant trading, however that percentage has declined in the last few years. [1]

what are quants

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