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13.05.2020

Quants - A-League Traders

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If you ever want to grow professionally as a trader, the most privileged club you may dream of joining is that of quantitative trading. Only those who are geeks and financial masterminds at the same time can get a VIP pass to the quant community. The analysts who work in this sphere earn impressive average salaries of $150,000 per year. Can you become one of those geniuses? And are they so smart after all? We are going to find out.

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Terminology First

Automation is an evolving trend in trading, which also creates confusion between automated and quantitative trading. These two types have a slight difference in meaning.

In Automated Trading, traders set the rules of order management and then make a program perform them on their behalf. So, after the initial data is pre-programmed, a human is not involved in the process anymore. 

In Quantitative Trading, professionals use advanced mathematical and statistical formulas to execute complex algorithmic trading strategies. The key is to interpret historical market events and to create a sequence of actions that may help to predict whether these events will lead to potentially profitable trades. The ready-made models can be applied both automatically and manually. Quantitative Trading is used mostly by hedge funds, but some well-to-do individuals can also afford to hire a quant to make their trades skyrocket in the most cutting-edge way.  

OK, Google. It is all crystal clear now.

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Can you Progress to a Quant Trader?

Keep in mind that a significant salary implies office work and great responsibility. So, if you are a fan of pajamas + slippers uniform, 24/7 access to a coffee cup, and your precious hours of procrastination, quantitative trading is not for you. Here is a list of qualities and qualifications any quant-to-be should put in a CV.

Go-to Tech Guy

A solid foundation in academic mathematics and statistics is a must. You should be able to code in various languages (Phyton, Java, C++, and others), apply logical reasoning to all the steps you perform, code-decode-backtest as fast as an Olympic sprinter, and as thoughtfully as a Greek philosopher.  

Market-Savvy

To blend in the market, you must know it from A to Z. It is not enough to understand trading techniques. You are to see the financial universe with new eyes that is to track the connection between economic and political events and the traders’ behavior triggered by them.

Quants usually analyze multiple whitepapers and case studies of corporate actions in regards to this or that stock, commodity, or derivative. Based on this info, these gurus can build decent algorithms for a price movement forecast.

So, dig deep – be a rocket-scientist trader!

Concentrated

Even a small mistake can cost you many-many dollars. So, ‘always on a lookout’ is the best slogan to print on your corporate T-shirt.

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Innovative

It is not enough to be a good programmer and operate big numbers; you should always be creative about new approaches to the market. Be bold and try unusual solutions because you never know what might work. Self-analysis and upskilling are your crucial reference points in the world of pacey technologies. Here are some spheres you can study. For example, Machine Learning or Deep Learning, Financial Engineering, Econometrics, Time Series Analysis, etc. Never be complacent – be knowledge-greedy!

Risky yet Considerate

Not any trader can become a quant. The specific mindset includes excellent risk-management skills, the ability to accept failures, be adaptable, work under stress for long hours. Be honest with yourself. If you freak out when losing $500 – quantitative trading is not for you!

Heh, that’s a lot of info to reflect on. Take your time, and once you are ready – move on to more theory.

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Don’t Try this at Home

Keep in mind that quants work with the fastest computers in the world and own huge amounts of data available for big corporations only. It means that their resources are infinite while yours are limited. Thus, do not compare yourself to the idyllic picture I am describing and do not try to replicate their workflow at your home-office. 

The four main components that comprise the job of a quantitative trader are:

  • Strategy Creation

At this stage, they collect all the information they can to apply quantitative analysis to and identify the best strategy for a client. What trading frequency will it have? Will it fit into a portfolio of already running strategies? Is it optimized enough? These and many other questions are to be answered at this point. I see this period as data collection and moments of self-doubt, which eventually lead a quant to the best possible solution.

  • Backtesting

It is the backbone of any automated trading. It puts the selected strategy in the replicated real world. Based on the historical data from the past, supercomputers test how the strategy may perform in the market and whether it can be profitable. Though being a necessary step in quantitative trading, the results of such backtests do not guarantee anything but rather provide additional ground for the experts to rely on.

  • Execution

It happens when quants let their invention out to the market for real. The strategy generates trades. Then they are executed either automatically/semi-automatically (high-frequency trading) or manually (low-frequency trading) via a brokerage.

  • Risk Management

The final piece of a quant strategy cake is risk management that includes all possible events that can prevent the strategy from functioning as planned.

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Wrap Up: Yes or No?

There is certainly no harm in dreaming big and being ambitious. If you are just starting your way up to quant heaven, stay disciplined, hard-working, and stress-resistant. Prepare to work long hours but be generously paid, respectively. 

Being an expert comes through a great desire to dive deep into the inner workings of investments. If you see yourself as a creator rather than a performer, quantitative trading is your perfect choice.

It can be nerve-wracking and challenging but stays the most prestigious sphere for a trader. Do not hole up in your bedroom, venture into technological trading - join in!

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