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Quantitative Trading – Definition, Work, Systems, And More

Quantitative Trading uses sophisticated mathematical and statistical models and computing to identify profitable opportunities in financial markets. Quantitative Trading is known for implementing advanced modern technologies in massive databases to analyze market opportunities comprehensively.

For quantitative traders, price and capacity are the most critical variables, and the larger the data set, the better.

Trading has always will like to weather forecasting. If that is the circumstance, quantitative traders are equal to modern real-time meteorologists using the latest state-of-the-art equipment to determine the weather of any particular place at any given time.

Indeed, the results may not be accurate all the time, but the success rate is usually more than respectable, and any predictions will base on both a vast historical database and the current one

How Quantitative Trading Works

Quantitative Trading is primarily data-driven and uses purely statistical and mathematical models to establish the probability of specific outcomes. That’s why quantitative Trading has long been a preserve of major financial institutions and high-net-worth individuals. However, in recent days, it is being increasingly used by retail investors as well.

Strategies of Quantitative Trading

Here is an explanation of some of the strategies used by quantitative traders

Statistical Arbitrage Quantitative Trading

It is a strategy designed to take benefit of the mispricing of assets in the trading market. Moreover, statistical arbitrage trading occurs in seconds or minutes when the underlying exchange or service fails to price the purchase at its actual value. As a result, Trading takes less time, so there is less exposure to market risks.

Market Creation

This strategy will make money by expanding the buy and sell offer. Creating a market is simply buying the best offer and selling the best bid prices. Thus, market makers act as wholesalers in financial markets, with their prices reflecting demand and supply in the market. They are not necessarily brokerage firms but prominent market participants that provide a more liquid market for investors.

Mean Reversal

Mean return will base on the idea that extreme prices are rare and temporary and that the costs of financial assets will always tend to have average prices in the long run. An average can represent a complex mathematical formula or simply by the standard of prices over the last X periods, like the Simple Moving Average. Defined deviations from average prices represent an opportunity to trade the underlying market. If prices are below the regular price by the declared deviation, it is an invitation to buy; likewise, selling opportunities will arise when prices are above average by a predetermined deviation.

Directional Strategies

These are strategies designed to seize the ultimate direction in the market. First, the market direction can predict using past price information and volume data; then, it can implement the appropriate directional plan in the market. In markets such as long-term bonds and select stocks or cryptocurrencies, quantitative trading systems can determine when there is genuine upward or downward momentum so they can ride the wave.

Event Arbitration

Economic events like mergers and acquisitions in the stock market can create short-term opportunities that quantitative traders can exploit. In the case of unions and investments, the idea is usually to sell the acquiring company’s stock and, at the same time, buy the company to be acquired. The risk of event arbitrage is that there is contact to market risk in case a trade is cancelled, which could happen due to legal challenges or other complications.


This controversial commercial technique continues to this day, despite being considered illegal. It involves placing limited orders outside the target offer range with no intention of executing them. For example, if the price of EUR/USD is 1.2000/1.2005, an order can place at 1.2010 for a buy position.

It creates an illusion of increased market demand, but the disruptive algorithm will cancel the trade before executing it.

The intention would have been to obtain a higher selling price than prevailing prices. It is typically associated with large institutions in some traditional markets, but it is difficult for a single entity to manipulate the price in modern markets.

Final considerations

Quantitative Trading will continue to become increasingly popular in financial markets as technology becomes more democratic. It represents a holistic way of objectively trading in a fast-paced and dynamic market. If you are ready to enter quant, AvaTrade is here to provide access to intuitive trading platforms for you.

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