Quantitative trading uses mathematical functions and automatic trading models to make trading decisions.
In this type of trading, validated data is applied to various scenarios to help identify profit opportunities.
The advantage of quantitative trading is that it allows you to make optimal use of the available data and eliminates the emotional decisions that may arise during trading.
The disadvantage of quantitative trading is that it is of limited use: a quantitative trading strategy loses its effectiveness as soon as other market participants learn about it, or as market conditions change.
High-frequency trading (HFT) is an example of large-scale quantitative trading.
Arbitrage Pricing Theory (APT) is a multi-factor asset pricing model based on the idea that an asset’s return can be predicted using a linear relationship between an asset’s expected return and a set of macroeconomic variables that account for systematic risk.
Beta (β), primarily used in the Capital Asset Pricing Model (CAPM), is a measure of the volatility or systematic risk of a security or portfolio compared to the market as a whole.
A cup and handle is a technical charting pattern that resembles a cup and handle, where the cup is shaped like a “U” and the handle is slightly offset downwards.
The Dow Theory is a technical framework that predicts that a market is in an uptrend if one of its moving averages rises above a previous important high, followed or followed by a similar rise in the other moving average.
Elliott Wave Theory is a form of technical analysis that looks for recurring long-term price patterns associated with constant changes in investor sentiment and psychology.
The Fama French three-factor model is an asset pricing model that extends the capital asset pricing model by adding size and value risk factors to market risk factors.
Mean reversion in finance assumes that various phenomena of interest, such as asset prices and earnings volatility, eventually return to their long-term average levels.
Modern Portfolio Theory (MPT) is a method that risk-averse investors can use to create diversified portfolios that maximize their returns without an unacceptable level of risk.
Negative or inverse correlation describes when two variables tend to move in the opposite direction and magnitude relative to each other, so that when one variable increases, the other variable decreases, and vice versa.
The Sortino ratio differs from the Sharpe ratio in that it takes into account only the standard deviation of the downside risk, and not the total (up + down) risk.