Beware of the traps — Quantitative Trading Mistakes

  1. Understanding statistics/probability.
  2. Model implementation.
  3. Strategy back-test/simulation.
  4. Risk Management.

Understanding Statistics and Probability

  1. Correlate prices instead of returns (either log-returns or actual returns) — When we deal with time-series we usually deal with assets prices. Assets prices are “non-stationary” in their nature. “Non-stationary” process basically means that the asset presents a trend (or a non-mean-reverting process). If we will take, for example, Gold Spot price vs. US 10yr real yield we can clearly see the effect of using non-stationary data. This is a regression of the Gold/Yield prices
Gold/US 10y Real yield price regression. R²=0.81 , R=-0.9
Gold (Log Rtn)/10yr Real yield ($ change) . R²=0.18, R=-0.43

Model Implementation

USDJPY 1-week RVol vs UDSJPY 1-month RVol regression.

Model Simulation

Risk Management

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Harel Jacobson

Harel Jacobson

3.2K Followers

Global Volatility Trading. Python addict. Bloomberg Junkie. Amateur Boxer and boxing coach (RSB cert.)!No investment advice!