Sunday, 26 July 2015

Streetwise quants

08:53 Posted by The Thalesians (@thalesians) No comments

Who is an expert on Greece? Me? No. You? You can answer that, rather than me. Economists covering Greece? Yes (although admittedly not all of them). The market as a whole? Probably not, judging by all the volatility around recent events. However, if you traded any sort of macro asset class in recent years, it was difficult to make decisions without considering the situation in Greece. Of course, the market's focus on Greece has gone through phases, with potentially the most acute stage leading into the recent deal. This article isn't really about me espousing any view about the deal, given I've already admitted I am not a Greek expert. That being said, I do hear the echoing sound of can getting kicked down the road....

Instead, I brought up the matter of Greece, to illustrate my main point, namely the link between trading on what you do know and what you don't know. There are things, we clearly don't know, namely the precise outcome of the future. There are things we do know (or at least can learn to know), such as understanding current market dynamics from which we can seek to make predictions about the future. There is obviously a question of how much detail we drill down into any specific area when analysing market dynamics. A first glance does not always reveal much about a situation (for example, the picture above: is that an ordinary burger, a second glance might yield the true answer? Contact me for the answer!)

Time is the limiting factor, when trying to research the market. Hiring additional people can alleviate this, but that costs money. In effect a trader's job is not only about allocating capital for investing, but also appropriately allocating intellectual capital that needs to be made to come up with trade ideas.

Quantitative traders sit at the crossroads between markets and quantitative analysis. Hence, it can become very easy to overemphasis the quantitative analysis part and everything that goes on around that. To trade systematically, quant traders need to have a trading system which does the job. They need to think about quantitative techniques which can be used to implement a trading strategy. The temptation is to try to make a "perfect" trading system, a "perfect" trading strategy which is incomprehensible to anyone but a maths professor.

Sure, it'll make you feel smart. But will it make money, if it takes so long to implement? Furthermore, is the complexity just making you look smart, and not adding value? If it's not adding value, you've wasted time, and hence money. Make a trading strategy simpler and then elaborate and tune it, rather than the other way round. Complexity is not necessarily a way to make a good trading strategy. I absolutely love maths, but maths is a tool for traders, not the main objective of a trader.

The simplest trading strategy of all, long only, has made money over the decades! Being a quant trader can be fun, but always remember the end goal is to trade (profitably!) and not purely to write code. A bit of "streetsmart" or "sweetwise" knowledge about markets can sometimes go further than very deep analysis. At the other end of a trade is not physics but another human looking to beat you.

If you're on the US East Coast, I'll be in Washington DC 26 Sep, NYC 28 Sep-3 Oct and Boston 5 Oct if you'd like to meet me and hear more about systematic trading! If you're in mainland Europe, I'll be in Frankfurt 7 Sep and Zurich 8 Sep.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt & Zurich- join our group for more details here (Thalesians calendar below)

22 Jul - London - Paul Bilokon - Stochastic Filtering
07 Sep - Frankfurt - Saeed Amen/Yves Hilpisch/Thomas Wiecki/Jochen Papenbrock/Miguel Vaz/Adrian Zymolka - Quant Evening (Thalesians/Quant Finance Group Germany)
08 Sep - Zurich - Saeed Amen - How to build a CTA? / interactive Python demo
23 Sep - London - Stephen Pulman - Multi-Dimensional Sentiment Analysis


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