What is Quantitative Trading? Full Guide from Strategies to Crypto Applications

What is quantitative trading?

Quantitative Trading is an automated trading method driven by mathematical models and algorithms. It uses data analysis, programming, and statistics to develop a clear and repeatable trading strategy, and avoids human interference through automated order placement. This method originated from Wall Street and has gradually spread to the encryption market, foreign exchange, commodities, and even the NFT field. Quantitative trading mainly includes three core processes:

• Strategy Construction: Test models using historical data, such as moving average crossovers, momentum strategies, arbitrage models, etc.
• Risk control design: establish limits such as stop-loss, take-profit, and capital ratio.
• Automatic Execution: Quick order placement and management through API and trading bots.

Why is the cryptocurrency market particularly suitable for quantitative trading?

1. 24/7 uninterrupted market
   The encryption market operates year-round without any closing hours. This means that quantitative programs can execute strategies around the clock, without missing any market opportunities.
2. high volatility
   Price volatility is a common phenomenon in the cryptocurrency space, creating more profit opportunities for quantitative strategies (such as trend following and arbitrage).
3. Open API and data transparency
   Most centralized exchanges (such as Gate) provide API interfaces along with real-time K-line and order book data, which is beneficial for programs to respond instantly to market changes.

What are the common quantitative trading strategies?

Trend Following

Determine the trend based on technical indicators such as the moving average of asset prices and Bollinger Bands, and once the market starts, follow up with positions.

• Suitable cryptocurrencies: BTC, ETH and other mainstream coins
• Risk: It is easy to generate false loss signals during consolidation.

Mean Reversion

Assuming that the price will fluctuate around a certain “average value” in the long term, when the price deviates too far, a reverse operation will be performed.

• Application scenarios: dual-currency arbitrage, oscillating market trading
• Tool reference: Bollinger Bands, RSI indicator

High-Frequency Trading (HFT)

By leveraging extremely high order frequencies to capture the bid-ask spread, it requires very high infrastructure, usually executed by trading institutions.

• Advantages: Mastering market microstructure allows for harvesting very small but stable profits.
• Challenges: technical barriers, transaction fees, slippage control

Market Neutral

For example: Statistical Arbitrage or Hedge Strategy, capturing price differences through hedging positions across different assets or exchanges.

Example: Buy ETH on Gate while shorting ETH perpetual contracts on another exchange to profit from the spot and futures price difference.

Risks and Challenges

Although quantitative trading seems stable and automated, it is not foolproof. Here are some potential risks:

• Overfitting: It performs well in historical data but completely fails in live trading.
• Exchange Risks: Issues such as abnormal CEX risk control, API interruptions, and significant slippage.
• Black Swan Events: Such as the LUNA collapse and the FTX explosion, leading to unexpected strategy liquidations.
• Backtesting and real trading deviation: Under real market conditions, liquidity and transaction fees can have a significant impact on results.

It is recommended that beginners start with semi-automatic trading, such as using Python scripts to send trading signals, initially assisting with manual orders and gradually transitioning to full automation.

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summary

Quantitative trading represents a disciplined and systematic way of thinking, entrusting the instability of human nature to algorithms, allowing every trade to be traceable and optimizable. For Web3 players, this is an upgrade path to strengthen their technical skills, risk control ability, and capital efficiency.