SHOULD YOU BE A QUALITATIVE OR QUANTITATIVE PROP FIRM TRADER?
Retail forex trading has become relatively detached over the last 5 years to the non-retail side of the markets. Technical analysis has become dominant, and most traders are not familiar with even basic quantitative analysis that they could be using to level up their forex trading. If you’re looking to become a prop firm funded trader, understanding all the data-driven insights you could be using, and then combining this with your current trading approach, could greatly increase the success you see. And it could potentially save you a lot of wasted months.
In this article, we’re going to look at these two approaches to trading, the qualitative approach and the quantitative approach, looking at their characteristics and even the idea of a hybrid approach. So, let’s get into it…
Qualitative Or Quantitative Approaches In The Prop Firm Industry
Largely speaking, most traders take a qualitative approach to trading. This is one of the leading reasons why most traders fail. They aren’t making data-driven decisions and are trading purely off the back of human bias – something that isn’t all that reliable. This is a very crude comparison, but if you take the results of the average retail forex trader against the results of the average quant fund, we’ll clearly see that quant funds outperform most traders on a consistent basis. Of course, they have more technology, more manpower and more knowledge of the markets, however, most importantly, they’re using data collected to drive their decision-making. This is crucial to a trader’s success.
Qualitative Forex Prop Firm Trading
A qualitative approach is typically the most popular approach within the retail forex trading community. This is where no data is used in the decision-making process of trading strategies or methodologies. Typically, traders will get an idea for a strategy or absorb online content about simple price action strategies and adopt that approach within the markets. This, more often than not, leads to traders taking consistent losses and not being able to make their strategies profitable.
Traders are quick to blame psychology, market makers, fear and greed as to why they are losing in the markets. Although to some degree this is true, to a larger extent it’s going to be down to unprofitable trading strategies and poor decision-making. These traders use a huge amount of bias in their trades, rather than long-term market data, to help drive their profitability forward.
Quantitative Forex Prop Firm Trading
Quantitative trading is typically the approach that the most profitable forex traders take. This is where traders use a huge amount of data to drive their decision-making, and they can be confident in the outcomes. This doesn’t mean that data-based traders don’t lose trades. However, this does mean that they’re confident in their edge over the long term and can confidently take trades in the market without worrying about short-term fluctuations in equity.
To take a quantitative approach to your trading, the first thing you need is a lot of accurate market data. Luckily, there are many good back-testing tools in the market you can use for this data collection. You may also need to collect economic data too. Ensure that your data is as high quality as possible, 99.9% accurate – or any testing will not be accurate. Test a huge number of strategies using statistical concepts, time series analysis and probability theory to determine successful strategies. After concluding testing, you’ll have a pool of consistently profitable strategies within the markets. You’ll then want to ensure that there is not a direct correlation between your new strategies, as the correlation will cause larger draw-downs during losing periods.
These strategies can typically be fully or partially automated, as the decision-making is often consistent. This can lead to an even larger edge in the market by completely removing human bias and error.
The Hybrid Approach – Combining Data And Human Touch
There is a place for taking a hybrid approach in the markets, by combining data with human bias. Let’s take economic news for example.
According to your data-driven approach, there may not be a potential long on EURUSD as one of the trading criteria is not met. Therefore, no trade should be entered. However, there is economic news coming out for the USD, and you’re confident in assuming that EURUSD will be moving swiftly to the upside over the coming days. You may choose to enter the EURUSD long, even though you have no data to validate how effective the trade will be during that specific situation.
This approach may play out in your favor, it may not. The logic being that markets are constantly evolving and adapting over time, so a strategy tested over the last 10 years may be losing its consistency and using a degree of qualitative style within your portfolio could be useful.
Which Is Best For Your Prop Firm Trading?
Ultimately, what is best for your trading will be down to yourself. If you’re already a consistently profitable trader by just using qualitative trading methods, you should continue doing so. However, there may very well be the chance to improve your edge, or automate your strategy entirely by taking a more data-driven approach to your methods. If you’re unprofitable, it would be best for you to start testing and making your decisions based on actual data. Press pause on your live trading account for now and start back testing a huge number of strategies with variations. The combinations are endless.
The faster you can do this, the better.
Taking this objective data-driven approach allows you to identify profitable strategies and management styles within the markets to aid you in becoming a profitable trader. Hopefully, even prop firm funded!
In Summary – Should You Take A Qualitative Or Quantitative Approach?
In conclusion, taking a quantitative approach to trading is typically your best bet at success within the markets. However, a hybrid approach can also work nicely, encompassing a level of fluidity and bias into your trading.
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Our commitment is to help traders excel and provide the tools and capital they need to compete in a marketplace defined by change and disruption.
We are focused on seeking out trading and investment opportunities to grow our capital in the global financial markets.
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