Over the years I've learned and practiced many types of trading. I'm an options trader, both directional and non-directional. I've practiced discretionary trading using technical analysis. I've used fundamentals, a million indicators, and every combination you can imagine. Like most things in life, hopefully we eventually migrate to what works. For me, that begins with Quantitative Analysis, or as I described in the last post Quantitative Trading.
I've written a fair amount on this blog about knowing your trading "edge". In short, if you can't quantify it, you shouldn't be so sure it exists. Quantitative Trading, is nothing more than just that... it is the quantifying of a trading strategy. There are lots of reasons to do this; so, if it isn't completely obvious, let me name a few:
One of the most important components in trading psychology is confidence. Traders who work under a shroud of doubt are constantly second guessing trades, over-trading, missing trades, and making many other psychological mistakes. Quantification breeds confidence. For example, in my current trading system I have tested (both backtested and in real-time trading) millions of trades. I know precisely what my edge is. I know that my average trade yields 3.2% and lasts 3.07 days. The market goes up and the market goes down, but I KNOW that when I put a trade on I make 3.2% over time. I'll speak more about this when I get to some of the key metrics a trader should know, but for now my main point is simply that this sort of evaluation of your trading rules can really help you shed the doubt and consequently the mistakes that go along with it.
Simplicity:
I don't pretend that developing your trading system is simple. It can be, and probably should be (over-complicated systems tend to be curve fitted to the data), but it does take some work and study to learn how to do it. Once I established my systems, however, trading couldn't be easier. I hesitate to tell you just how easy. I spend about 15 minutes a day on my trading. Its a really easy process. Unlike discretionary traders, I don't have to spend hours evaluating charts or laboring over earnings reports. I run a simple script and enter my trades... 15 minutes... on a bad day.
Less Emotion:
Read the sentence above and see just how emotionless this is. I run a simple script and enter my trades... 15 minutes... on a bad day. Emotionless trading is what professional traders strive for. Emotions, as I alluded to above, often get us into trouble. They are the things that cause us to second guess, freeze up, and make mistakes. Agonizing over whether or not to take a trade is not my idea of a good time. I have lots of things to get emotional about, and trading isn't one of them.
Profits:
Okay, this is what we're all here for, right? To some degree I like playing with numbers and working out the puzzle we call the market. But in the end, I do this so I can retire some day and still provide for my family. This is about making money. One of my favorite reasons for Quantitative Trading is that it works! My track record is an open book at this point (see the CoVestor widget in the upper right corner). Every trade is published and audited, so there is no hiding if I fail. I really don't know how the future will unfold, but for now this is one reason to love a good system.
Consistency:
This isn't necessarily true of every trading system, but it is true of the one I use. It is pretty consistent. Over the past 12 years of backtesting and real-time trading my system has posted a profit 91% of all months. One of the tenets under which I developed the approach was this: "I never want to be more than a few days away from an all time high in my account". That philosophy has led me to develop a system that is fairly consistent and churning out profits. As I say, not all systems have this characteristic. It's really up to the developer.
There are probably many more, but these are a few of the most important reasons that I love being a quantitative trader.
Good Trading...
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