Cryptocurrency trading is now one of the hottest topics in the trading world. While many people are quite familiar with what cryptocurrency trading is, fewer people know about quantitative trading in cryptocurrency. In today’s article, we will give its definition, some strategies, and its main advantage in trading.
What is quantitative trading
Quantitative trading is an extremely complicated area in finance and it takes time and effort to learn how to do it. There are many definitions of what is quantitative trading. Over the past century, investments based on the value and trend of an asset is the trading strategy that has been favored in the traditional financial market. With the development of computer technology, by combining advanced technology and the existing investment methods, the concept of quantitative trading came into existence.
It refers to the replacement of personal judgments with advanced mathematical models, using software technology to select various events with a high possibility of generating excess income within a large historical database to help to formulate strategies. This method efficiently prevents investors from being psychologically influenced and making irrational decisions when there is a panic or over-sentiment in the market.
Usually, traders choose a trading technique and use mathematics to create a model, then they develop a computer program to apply said model to historical market data. The model gets back-tested and optimized until favorable results are achieved and it will then on be implemented in real-time markets. Quantitative analysis using these models reveals specific patterns in the data and makes clear where the market is going.
Quantitative trading strategy
Price and volume are two of the most common data inputs used in quantitative analysis as the main inputs into the mathematical models.
Some Quantitative trading strategies include high-frequency trading, algorithmic trading, and statistical arbitrage. These techniques are used quickly and typically have short-term investment perspectives. Many quantitative traders use quantitative tools like moving averages and oscillators.
Most of the Quantitative trading strategies are either Trend Following or Mean Reversion based. Both are dependent on market conditions. Currently, most of the world markets go sideways due to the lack of any aggressive economic reforms. Mean Reversion strategies work well in Sideways Market. One of the most frequently used one is the CCI Indicator.
The Commodity Channel Index (CCI) is an oscillator indicator that accurately identifies overbought or oversold assets. It was earlier developed by Donald Lambert in 1980 and was originally used exclusively for commodities trading. It later also found its application in Stocks and Futures as well. The CCI compares the current price to the average price for a certain time period. If the current price is higher than the average price, it indicates an Overbought condition, while if the current price is lower than the average price, it indicates an Oversold condition. CCI value oscillates between two extremes, therefore it is particularly useful for Mean reversion Trading systems.
Advantage and Disadvantage of Quantitative trading
Is quantitative trading extremely profitable? What are the advantages and disadvantages?
First of all, its main advantage is that it helps to eliminate emotional factors in decision making. Think about it. The fear of failure and the greed inside human beings causes them to blindly follow the trend and trust news from unreliable sources. The mathematical models will never lie to you and always provide you with a reliable conclusion that you can count on.
Secondly, its ability to calculate the optimal probability of executing a profitable trade is really useful. Traders can effectively monitor, analyze, and make decisions using it without having the problem of incoming data overwhelming the decision-making process.
However, quantitative trading does have a disadvantage. The cryptocurrency markets are relatively new and volatile so there are not as many patterns that can be found as in traditional markets. What’s more, it is unstable as both internal and external factors affect the market. This can make quantitative trading more difficult for some, but it also means that the pioneers cracking the codes will get exponentially higher rewards.
This concludes today’s article on quantitative trading in cryptocurrency and its advantages and disadvantages. We hope you learned a lot, enjoyed the read, and stay tuned for more great content.