Quantitative Trading: How to Build Your Own Algorithmic Trading Business

“Quantitative Trading: How to Build Your Own Algorithmic Trading Business” by Ernie Chan is a practical and insightful guide designed for traders interested in developing their own algorithmic trading strategies. The book takes readers through the entire process of creating a successful quantitative trading business, from conceptualizing strategies to executing them in live markets. It’s part of the Wiley Trading series, making it a highly regarded resource for traders wanting to dive into quantitative methods.

Here’s what the book covers:

Introduction to Quantitative Trading: Chan starts by explaining what quantitative trading is and how it differs from traditional discretionary trading. He breaks down the basics of using mathematical models to identify profitable trading opportunities and introduces the idea of systematic trading strategies.

Building Your Own Trading Strategies: One of the most valuable aspects of this book is its focus on the practical development of trading strategies. Chan explains how to create strategies using quantitative methods, including backtesting historical data to verify their effectiveness. Readers are guided on how to evaluate the risk/reward ratios and the robustness of different models.

Programming and Automation: Since algorithmic trading requires the use of computers to execute strategies, Chan provides an introduction to programming in Matlab, Python, and other tools used for backtesting and implementing trading algorithms. He highlights how to automate your strategy so that trades can be executed without human intervention.

Managing Risks: Managing risks is crucial in any trading business, and Chan dedicates a section to identifying risks specific to algorithmic trading. He discusses how to incorporate risk management techniques into your strategies and protect yourself from market volatility and unexpected losses.

Execution and Transaction Costs: One of the key challenges in quantitative trading is ensuring that strategies work in real markets. Chan discusses slippage, transaction costs, and other execution issues that can affect profitability. He also touches on how to optimize the performance of your strategy under real trading conditions.

Starting Your Own Trading Business: The book also delves into the entrepreneurial aspect of quantitative trading. Chan offers advice on setting up a trading business, choosing a business structure, obtaining capital, and developing the infrastructure necessary to operate an algorithmic trading firm. This section is particularly useful for those looking to make the leap from individual trader to full-fledged business owner.

Advanced Quantitative Concepts: For readers already familiar with the basics, the book also explores more advanced topics like mean reversion strategies, momentum strategies, and portfolio optimization. Chan provides insights into high-frequency trading and other specialized forms of algorithmic trading.

Case Studies and Examples: Throughout the book, Chan provides real-life examples and case studies to illustrate the application of quantitative trading concepts. He walks readers through the entire lifecycle of a strategy, from inception to execution, to help them understand the nuances involved in algorithmic trading.

Ernie Chan’s background as a former quantitative researcher at financial institutions like Morgan Stanley gives the book a professional edge, combining academic theory with real-world trading experience. The book is known for its accessibility, making it suitable for both beginners with a basic understanding of programming and experienced traders who want to delve into quantitative methods.

Key Takeaways:

Hands-on approach: It’s a highly practical book that guides you through the process of creating and automating your own trading strategies.
Balance between theory and application: While the book covers essential quantitative concepts, it emphasizes the practical application of those concepts in live markets.
Real-world focus: Includes strategies and tips that are tested and used by professional traders, ensuring relevance to actual trading conditions.
This book is a valuable resource for anyone interested in algorithmic trading, offering clear explanations and step-by-step instructions on how to build a successful quantitative trading business from scratch.