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Sorry if the question sounds rough. It's not my intention to devaluate something I've not yet understood like Quantitative Finance.

So to keep it simple:

  1. is Quantitative Finance a science, like Math or Physics?
  2. Or is it something more similar to Technical Analysis, but with much more math into it?

I know Technical Analysis is not a science, but an attempt to apply math to past financial data in order to find a way to predict the future movement of the same financial data.

Obviously things can mix up and create confusion.

Formulas like a simple Moving Average are real math and they are still in the field of science. It's when people attempt to apply a moving average to predict the future that they trespass the border of science to enter the field of empirism (that unfortunately in worst cases might even lead to charlatanism).

It confuses me even more when I read on Wikipedia about "Algorithmic trading quant"

Often the highest paid form of Quant, ATQs make use of methods taken from signal processing

Well A T3 (the so called Tillson's moving average) comes from signal processing (low pass filter/differentiators digital filter) and it's used in Technical Analysis.

So if someone uses a simple Moving Average is a Technical Analyst, but when he uses a T3 moving average is a Quant, because the latter one is more complicated to be calculated?

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  • $\begingroup$ Hi Marco, welcome to quant.SE. While your question is interesting, it is not within the scope of the site. To answer the broader question, "what is quantitative finance", I suggest you see wikipedia. Otherwise, perhaps you should narrow the focus of your question to something that is not answered on that page. For example, you could ask "At what point does someone using technical indicators become a quant?" $\endgroup$
    – Tal Fishman
    Commented Oct 3, 2011 at 17:24
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    $\begingroup$ @Tal Fishman: thanks for not closing the question, I updated the title. I saw wikipedia, but I still not understand the difference between Quant and Technical Analysis. In the Wikipedia section called Criticism they say: "...their credibility was damaged by the financial crisis of 2007–2010." That phrase makes me think at a Quant like a Technical Analyst with just a Ph.D in Math. But it sounds odd, the few Mathematicians I met never believe in somthing that can not be demonstrated with a Theorem, I can't imagine a Mathematician believieng in Technical Analysis (he probably even despises it). $\endgroup$
    – Marco Demaio
    Commented Oct 3, 2011 at 19:31
  • $\begingroup$ A trader doesn't necessarily have to be a Quant. $\endgroup$
    – pyCthon
    Commented Nov 19, 2013 at 22:17

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There is certainly much more to quantitative finance than technical analysis, and a previous question does a decent job of outlining the different areas, as does the wikipedia on "quantitative analyst".

Even for what wikipedia terms an "algorithmic trading quant" or what Mark Joshi terms a "statistical arbitrage quant", technical analysis is just one tool in a very broad tool chest. Some quantitative trading strategies will make absolutely zero use of what would commonly be referred to as technical indicators, while others will rely on them quite heavily. I would say that two things distinguish a quant who uses technicals from a technician:

  1. A rigorous approach, which includes backtesting, statistics (t-statistics, confidence intervals), performance measurement (information ratios and information coefficients), optimization, and a large heap of broader understanding of what is driving returns.
  2. A balanced use of technicals as well as other types of indicators and/or non-technical-analysis methods (e.g. mean-variance optimization for position sizing).

An example of technical analysis as it would be applied by a quant is Evidence-Based Technical Analysis by David Aronson. Most other technical analysis books are garbage.

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    $\begingroup$ +1: thanks, starting to understand a bit the difference. Interesting book. I agree about the fact that most TA books are garbage. $\endgroup$
    – Marco Demaio
    Commented Oct 4, 2011 at 9:40
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Hi Quantitative Finance has in my opinion two main streams.

The first is about of valuation of some derivative contracts in a consistent way. This is a theory and once paradigms accepted it is coherent, it can considered as science at the same level as economy can pretend to this kind of terminology.

The second is about making (or trying to) prediction(s) over some time horizon about the behaviour of some underlying asset(s) in a statistical way, and ultimately trying to get advantage of your modelisation to generate some profit with "minimum risk taking" (this is purposely left ambiguous). This is more grounded (IMO)than the first branch as it is more dependent of microstructure of the paricular market you are studying, but can be as technical if not more than the pricing some exotic option.

The summum would be to reconcile both of course.

There is some kind of duality between those areas of QF just as there some kind of duality between probability and statistics.

Regards

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Quant in trading creates system that can be backtested, has a certain risk valuation. It is more like playing chess when you need to calculate multistep strategy.

Let say certain instrument moves 1% a day. Our goal is to create strategy for one year (250 step strategy). If we use stock + options we get 50 or more entries a day into our system for analysis. 250*50 = 12500 a year to analyze. So, in order to create strategy, we simulate dynamics of 12500 entries.

Can quant trading be taught. I think it is not possible. Because you should know about the market something that is not in books and other don't know. So, it is more like a craft.

But other areas of quantitative analysis like risk management are more instructions friendly.

Is the TA used in quant strategies. The answer yes. For example, price clusterization or levels in TA.

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  • $\begingroup$ I think it can definitely be taught. I started off trading manually then applied code to develop algorithmic based strategies and improved each with proper risk management. Sure, its best to trade the actual market first, that gives you real world experience. $\endgroup$
    – Goose
    Commented Feb 18, 2019 at 0:31

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