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Quantitative Analysis Vs Technical Analysis

January 7, 2010

Many of the traders might question is technical analysis actually the same thing as quantitative analysis?

Classifying quantitative analysis in the same category as technical analysis would create an outrage from quantitative traders as most of them are professional mathematicians, engineers or professors.  Since quantitative trading uses mathematical, numerical and quantitative technique. However in the industry we tend to address these traders as Quants. The demand for quants has led to the introduction of specialized Masters and Phd courses like mathematical finance, computational finance, financial engineering and financial analysis. According to Fund of Funds analyst Fred Gehm, “There are two types of quantitative analysis and, therefore, two types of quants. One type works primarily with mathematical models and the other primarily with statistical models. While there is no logical reason why one person can’t do both kinds of work, this doesn’t seem to happen, perhaps because these types demand different skill sets and, much more important, different psychologies.”

A common problem for a numerically driven Quants would be to develop a model of hedging, risk managing and hedging. Mathematical Quants actually tend to rely on numerical analysis and putting less focus on statistics and econometrics.

Technical analysis on the other hand is the study of price charts with a number of methods and tools. The principle of technical analysis is  to study the historical price movement of the market and trade in accordance using price movement actions or indicators.The oldest known example of technical analysis is a method developed by Homma Munehisa in the 18th  century which now evolved into candlestick charting which is a main tool used today. Technical analysts uses indicators which are basically mathematical derivations of price or volume. This help the investors to determine whether the market is trending or if it is ranging. Technical analyst also look at the relationships of price,volume etc. Examples of this include are the MACD and the RSI which is known as the relative strength index. Some technical analyst also look at the co-relation between different markets to make investment decisions. Some technical analysts will use sentiment indicators for example volatility in their analysis.

Technical analyst mainly seek to forecast price movement so that their successful trades will outweigh their losing trade which will in turn produce positive returns in the long run through discipline and strict money management.

Technical analysis actual “ignores” the actual nature of the market on basically is solely based on the charts which is unlike fundamental analysis. While fundamental analysis actually looks at the sovereign news, commercial news and announcements. However many investors actually uses a combination of technical analysis and fundamental analysis to make trading decisions.

In the Jan/Feb 2007 Issue of CFA Magazine, there is an article (“Perpetual Motion by Susan Trammell, CFA”) about a recent study on trends in quantitative investing. Below are some findings:

Phenomena Being Modeled:

  • Fund Capacity: 20%
  • Impact of Trades: 24%
  • Textual Data: 2%
  • Higher Moments: 2%
  • Regime Shifts: 10%
  • Volatility: 20%
  • Extreme Events: 10%
  • Momentum / Reversal: 31%
  • Trends: 28%

Modeling Methodologies Used:

  • Shrinkage / Averaging: 9%
  • Regime Shifting: 4%
  • Nonlinear: 7%
  • Contegration: 7%
  • Cash Flow: 17%
  • Behavioral: 16%
  • Momentum / Reversal: 28%
  • Regression: 36%

As noted in the tabulation of the results, momentum/reversal, trend and momentum are relatively popular in quantitative analysis. These are also the same tools used by technical analyst but with a less “scientific” approach.  Therefore, we can see that both of the are linked to one another. However some people see technical analysis more as a form of art rather than science.

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2 Comments leave one →
  1. January 7, 2010 5:32 pm

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  2. February 18, 2012 12:31 am

    Very useful!

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