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What is Quantitative Trading?

Quantitative trading is an investment strategy based on picking investments solely on mathematical analysis.

How Does Quantitative Trading Work?

Let's say John Doe runs the XYZ Fund. He uses the Quadrix system to screen and select stocks. The Quadrix system uses more than 80 variables in seven categories (momentum, quality, value, financial strength, earnings estimates, performance and volume) to pick stocks. It assigns a value to each variable, and John picks the ones with the highest scores.

Quantitative trading is active trading. Investors hold their positions for relatively short amounts of time, which means they can sometimes increase the volatility of the markets.

Why Does Quantitative Trading Matter?

Quantitative trading is a strategy run more by math than by humans. That's because the quantitative trader's model will signal what to buy and sell and when. The idea is that humans are emotional, and emotion has no place in investing. However, quantitative trading runs the risk of overlooking the fundamentals -- the less tangible aspects of companies that also add value (e.g., the quality of certain managers, the taste of the product, expectations about future marketing promotions, etc.). Nonetheless, quantitative traders with good models can make themselves very wealthy.

Ask an Expert about Quantitative Trading

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.