Quantitative Analysis
Statistics and math for traders
Quantitative methods bring scientific rigor to trading analysis.
Key concepts: 1. Standard Deviation: Measures spread of returns. Used in Bollinger Bands. 2. Sharpe Ratio: Risk-adjusted return. (Return - Risk-free) / Std Dev. Aim for >1. 3. Sortino Ratio: Like Sharpe but only penalizes downside deviation. 4. Maximum Drawdown: Largest peak-to-trough decline. 5. Profit Factor: Gross profit / gross loss. Need >1, prefer >1.5. 6. Kelly Criterion: Optimal bet size = (bp - q) / b where b=odds, p=win prob, q=loss prob. 7. Z-Score: How far a value is from the mean in standard deviations.
Monte Carlo simulation: Run thousands of random scenarios to estimate probability distributions of outcomes.
Pro tip: A Sharpe ratio above 1.5 with a profit factor above 2.0 is an excellent trading system by any standard.
Common mistake: Maximizing returns without considering risk. Better: Risk-adjusted returns (Sharpe) are more important than raw returns.
Key takeaways
- Sharpe ratio measures risk-adjusted returns
- Profit factor must be > 1 to be profitable
- Kelly Criterion calculates optimal position size
- Monte Carlo simulation estimates probability distributions
Quiz
- A Sharpe Ratio of 2.0 is considered: Answer: Excellent. Sharpe > 2 is considered excellent risk-adjusted performance.
Educational content, not financial advice.