Many traders shift to the quantitative side of the aisle in an attempt to get away from the emotional frustrations that discretionary traders are forced to deal with. However, quantitative Forex traders quickly learn that there are a plenty of frustrations with quantitative approaches as well.
While quantitative traders might not stress over whether or not they entered a position correctly, they are more likely to wonder whether their entire strategy is still viable. Instead of doubting their current positions, they spend their time doubting their backtesting results.
There was a recent post on Forex Crunch that looked at four hazards that Forex traders are faced with. While the article was interesting, I thought it would be more interesting to take a look at those same four hazards from a quantitative perspective.
News events are made out to be a very big deal on many different financial news channels. Many discretionary traders focus their entire strategies around things like crop yields or economic reports. Much of this is done with good reason, as those reports can affect prices.
As quantitative traders, our job is to follow the rules of our strategy, regardless of what the rest of the world is saying or doing. There is a tremendous danger to a quantitative trader’s mindset if he allows himself to be influenced by news events, even if those news events pertain to the markets he is trading.
Currency interventions are actually very similar to news events for quantitative traders. Both are unpredictable, and neither should impact your decision making process.
In the event of a government currency intervention, the most successful traders are the ones who are able to keep a level head and stick to their trading strategy. The traders who alter their strategies based on external events are usually the ones that blow up their accounts.
One of the trickiest hazards for any trader to deal with is their own psychology. One of the most complicated things about trader psychology is that it can be very hard to identify before it becomes a problem. After it is clear that psychology is an issue, it is probably already too late.
For quantitative traders, psychology issues generally stem from failure to stick to the rules of their strategy. If your system calls for you to wait for a bar to close before cutting a loss, it might be difficult to wait for that bar to close if it is already showing a massive loss. On the flip side, you might also talk yourself into ignoring a stop if your psychology gets in the way of a trade.
Another hazard that can frustrate quantitative Forex traders are faults that exist within the systems that we trade. This could stem from any number of biases that invalidate our backtesting results. It could also stem from a bug in our programming.
In order to cautiously avoid any system faults, we must be constantly on the lookout for them. Even the slightest error could seriously jeopardize your profits.