Algorithm (Algo) trading and quantitative (Quant) trading are sometimes used as interchangeable words but it's not true both are different from each other. The former one works on the algorithm with predefined instructions to execute the trades at very high speeds. At the same time, the latter works with the approach of mathematical calculations to find the best trading opportunities.

Both types of trading are becoming popular among traders providing them a better and more efficient trading system with more calculative utilization of data. And to choose the right one in your trading practice you need to understand the key differences between both of them. Here in this article, we are going, to discuss about difference between Algo trading and quant trading.

What is Algo Trading?

Algo or algorithmic trading is computer programming that works on a set of instructions that is mainly developed with the help of machine learning algorithms to perform market analysis and trading-related activities. Algo trading software can use the market data, or use the technical indicators or predefined instructions to execute the trades or book the profits.

Algo can perform multiple transactions or trades at a very fast speed while eliminating human intervention with better efficiency. Trading with Algo software, you can choose from pre-built popular strategies as per the market conditions. Or you can create your own customized strategy with modified parameters and technical indicators to trade as per your risk profile.

What is Quant Trading?

Quant or quantitative trading refers to the trading technique in which the trade decision and execution are based on mathematical calculation and statistical data. The quant model utilizes historical data to analyse the patterns and market trend to find the best trading opportunities.

The entire trade mechanism is based on statistical data like price and volume to utilize the same in trading strategies. Usually, quantitative trading strategies are used by financial institutional traders or hedge fund houses, but now the individual traders also use it. Quant trading is associated with high-frequency trading (HFT), though all quant trading is not a high-frequency trading.

Difference Between Algo Trading and Quant Trading:

How do Algo Trading and Quant Trading work?

Algo trading and quant trading both are performed as per the analysis and calculation process. There are several steps involved in Algo and Quant trading to develop these models and perform in various market conditions. Let's find out the steps involved in both types of trading.

Steps Involved in Quantitative Trading:

Researching: First, you need to start researching various concepts regarding trading with quant models. Analyse your investment goals and risk profile so that you can choose the right strategy and align them as per your trading approach and based on the current market conditions.

Selecting the Strategy: Based on your investment goals and risk tolerance, now you have to select the right strategy. Or you can take the help of technical indicators and other tools to pick simple or complex trading.

Also Read: How to Choose the Right Option Strategy in Algo Trading

Analysing the Data: The next step in quant trading is analysing the dataset in which you have to identify statistical data and other variables necessary for creating your model.

Developing the Model: As per the strategy you select, you need to develop a model, that you also have to backtest and customize or fine-tune as per the requirements.

Risk Management: In this step, you need to use risk management tools and techniques like stop-loss to evaluate the results given by the model. And based on the outcomes you can adjust these tools.

Implementing in Live Market: Now you can implement the model developed for quantitative trading in the live market to work as per the expectations.

Monitoring and Tweaking: You need to keep monitoring the model performance and outcomes with the strategy to make adjustments if required as per the outputs or changed market conditions.

Steps Involved in Algo Trading:

Create Strategy: The first step towards Algo trading is creating a strategy that should be efficient and capable of generating profits. You can use popular strategies like arbitrage and mean reversal or develop your own strategy that fits into your trading style.

Setting up the Algorithm: After creating the strategy now, you need to set theinstructions to your Algo as per the historical market data and history of the price movement to integrate the same into the Algo trading application to perform live market trading.

Algo Trading Software: This is the crucial step in Algo trading in which you have to acquire the right automated software for Algo trading. Herr you can choose the AlgoTest or TradeRadar reliable and one of the best algo trading software in the market. Using thissoftware, you can backtest your strategy with simulator feature to check the strategy performance in the actual market conditions.

Execution of Trades:  The last step in Algo trading is after strategy building and automation, now you have to deploy your strategy into the live market for execution. However, before the final execution, you can keep adjusting the algorithm up to multiple times as per your testing to improve its performance and get more accurate predictions and outcomes from such Algo trading software.

Summing-up

Algorithmic Trading and Quantitative Trading are both like automated trading solutions for financial markets for various investable instruments, including equities, commodities, currency and cryptocurrencies. The Algo trading works on the basis of a certain pre-defined set of rules or instructions that is fed through an algorithm to perform in various market conditions. Quant trading software uses historical data and mathematical calculations to analyse the market and work accordingly.

Also Read: What are the Features of Smart Options, an Algo Trading App

Both are different from each other in terms of mechanism, data analysis, trading approach, complexities, tools and method of execution. Quant trading is mainly used by institutional traders but Algo can now be used by all types of traders and that is thanks to various low-cost Algo trading platforms in the market. If you are looking to trade with Algo, choose the TradeRadar that can be accessed through Moneysukh’s Pro mobile app and that you can freely use when opening a demat account with Moneysukh.