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Quantitative Trading How to Build Your Own Algorithmic Trading Business by Ernest P Chan Book Review

Many individuals are under the misconception that Quantitative trading is for Institutional players and Hedge Funds.

Well, this book will clear the air and explain how an individual can also start his own Quantitative (Algorithmic) trading business and succeed.

Quantitative Trading: How to Build Your Own Algorithmic Trading Business by Ernest P Chan Book Review

Let’s get Quant

The author starts the book with a clear direction that the key to successfully applying Artificial Intelligence/Machine Learning to finance is to focus on Metalabeling – i.e., finding the probability of profit of your own simple basic trading strategy, and not to use it to predict the market directly.

The book’s target audiences are individuals aspiring to be Quant traders and those wanting to work for large institutions. Either way, it is always better to have a track record of your own as a profitable trader.

This invaluable experience forces you to focus on simple but profitable strategies and not get sidetracked by overly theoretical or sophisticated theories.

The book aims to teach you how to find a profitable strategy yourself. It teaches you the characteristics of a good strategy, how to refine and backtest a strategy to ensure that it has good historical performance, and, more importantly, to ensure that it will remain profitable in the future.

Where does one start?

If you are someone who is just a beginner, this book is just right for you. This book does not talk about how to analyze or trade complex derivative instruments. The kind of quantitative trading discussed here is statistical arbitrage trading.

One should aware of the fact that quantitative trading does not require you to be in front of your trading terminal all day. However, the urge to intervene manually is also strong when you have so much time.

The trick is to start small as you would do with any other business and scale up. Scaling up in quantitative trading is as simple as changing numbers in your program.

It all starts with a quest to find a strategy that will attempt to fulfill your trading goals. There are hundreds of trading ideas in the public domain, some even with back-tested results available. You would, however, need to understand how these work and back-test them yourself.

The Author, however, suggests that it is not just about the strategies available that you can choose from. It is about “YOU.”

Some considerations you may want to look into are:

  1. Working hours – How much time can you dedicate to trading.

  2. Your programming skills – If your programming skills are good enough, then you can explore high-frequency strategies.

  3. The trading capital – Your trading capital will decide what strategy suits you. It is one of the aspects that will dictate risk management and position sizing.

  4. Your goal – People who choose to become quant traders want to earn a steady and preferably increasing quarterly income. You will hence, choose a strategy that is the best fit for you.

Backtesting and setting up your trading business

Ernest feels that Backtesting is all about conducting a realistic historical simulation of the performance of a strategy. You will choose one which has a better winning probability and tweak it to your preferences. Some of the commonly used tools for Backtesting are Excel, MATLAB, Python, and R.

The hope always remains for all, be it a new trader or one trading for big institutions that produce similar results as in the past.

Many aspects need to be considered to reduce the divergence of future performance from the historical Backtest. Issues could be as follows:

  1. Data

  2. Performance management

  3. Look-ahead bias

  4. Data-snooping bias

  5. Transaction cost

  6. Strategy refinement

When setting up your trading business, it all boils down to what you want to achieve. As an individual trader, you must open an account with a brokerage firm and deploy your strategies. You can opt to join a proprietary firm where you can obtain much higher leverage than is available through a retail account.

The author discusses several differences in trading as an individual trader or with a proprietary firm. These will help you decide when you want to start your trading career as a quant trader.

Some of the major differences that stand out among all of them are the risk involved, restriction on trading style, leverage, liability to losses, and commissions/fees.

Ernest does not fall short in calling out the most important aspects that you look into if you trade individually or for a proprietary firm. These aspects are discussed in detail, so you know how to choose the best broker or proprietary firm you join.

Execution systems

Execution systems can be of different types based on how much you want to automate systems. A fully automated system has the advantage that it minimizes human errors and delays.

In the earlier days, you had to have sound programming knowledge to build your automated trading system. Now you only need to be an amateur programmer or even not one to build a fully automated trading system.

There are several platforms that allow you to build a trading system with little or no knowledge of programming. QuantConnect and Blueshift are among a few that let you build a fully automated trading system.

Typically, a semi-automated trading system is suitable if you need to run this step only a few times a day in order to generate one or a few waves of orders.

Money management

When it comes to risk management, most of the losses are due to overleveraging positions and not to an inherently erroneous model. You also have to be cautious or a performing model due to overconfidence and overleverage.

It all boils down to your psychology, even if you are a quant trader, as your system is only as good as you make it. The system might be good, but if you are overconfident, then you might not be doing justice to position sizing based on the strategy.

Even if you are a quant trader, you have to be prepared for the ups and downs of trading. All you have to do is build a good system and let it do its job. After all, Quant trading is about allowing the system to do its job and avoid human intervention like emotions taking over.


Quantitative trading is all about simply trading based on strategies and avoiding human intervention. You can also benefit from the lag that is created by physical trading and speed of execution.

With the kind of software available now, even an individual trader can beat the might of big institutional players if you have the right strategy built.

Get your copy now to read more about the strategies discussed in the book.

(Amazon paid link)

Guest Post - Written by Mr. Lal Bajaj, Bangalore

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