Quantitative Trading, 2nd Edition

CHAPTER 1The Whats, Whos, and Whys of Quantitative Trading

If you are curious enough to pick up this book, you probably have already heard of quantitative trading. But even for readers who learned about this kind of trading from the mainstream media before, it is worth clearing up some common misconceptions.

Quantitative trading, also known as algorithmic trading, is the trading of securities based strictly on the buy/sell decisions of computer algorithms. The computer algorithms are designed and perhaps programmed by the traders themselves, based on the historical performance of the encoded strategy tested against historical financial data.

Is quantitative trading just a fancy name for technical analysis, then? Granted, a strategy based on technical analysis can be part of a quantitative trading system if it can be fully encoded as computer programs. However, not all technical analysis can be regarded as quantitative trading. For example, certain chartist techniques such as “look for the formation of a head and shoulders pattern” might not be included in a quantitative trader's arsenal because they are quite subjective and may not be quantifiable.

Yet quantitative trading includes more than just technical analysis. Many quantitative trading systems incorporate fundamental data in their inputs: numbers such as revenue, cash flow, debt-to-equity ratio, and others. After all, fundamental data are nothing but numbers, and computers can certainly crunch any numbers that are fed ...