Technical analysis is often interpreted to mean "head and shoulders" type of TA. The funds do not want to risk the association, so they call it quantitative finance. In the end it's all a matter of finding the pockets of predictability and exploiting them while they last. Modern quantitative methods involve lots of math, physics and statistics, and is very different from the old-style H&S TA.
Both methods can be very rewarding. This has been proven countless times by long-term consistent winners in both camps. Is one better than the other? I would say not really. Yes the quants have a better success rate because they are exploiting inefficiencies. However in my opinion the discretionary trader has the largest potential for massive gain. So as always it's a matter of reward/risk. I prefer discretionary trading backed by solid economics theory and application. I happen to think it is the ultimate strategy. Otherwise wouldn't be trading it . Goodluck,
in LTCM's case you cannot seperate leverage from strategy because leverage WAS the strategy. the difference between quants and TAers is that the latter blow up one trader at a time, the former blow up one institution at a time.
...if I remember the epilogue correctly, the positions taken over by the bailout consortium broke even two years later relative to their value at the time of the bailout. However, the massive losses before that were not recouped. But I recommend that you get the book and read it for yourself. It's available in paperback. It makes for absolutely fascinating reading, especially because the character development seems to ring so true. I have never read financial writing more gripping or eloquent. It reads (except for the total lack of sex) like Paul Erdman's financial novels from the '70's. If you haven't read Taleb's Fooled by Randomness, it makes a fitting postscript. Best regards. - Mike
Another thing to keep in mind is that there is no such thing as "THE" quant approach, any more than there is "THE" technical or fundamental approach. All "quant" means is typically statistically based exploitation of inefficiencies, and it covers a huge range of different techniques. The inefficiency can be between multiple markets, between contracts in one market, or it can be between a projection of risk vs. return in one contract (or any number of other techniques). Everyone approaches quant trading somewhat differently, some always fully hedged and mechanically taking advantage of tiny inefficiencies, others selling naked and exposed based on statistical models that show a low possibility of risk and ruin. Yes, some quants have blown up. So have some tech and some fundamental traders, but this is largely a function of risk management, not specific approach to trade selection. Jessie
qunat guys usually build their model by assuming that the underlying prices follow some stochastic processes, in this way, they can use the current available methematical tools. but the question is if these assumptions are correct. classic technical analysts believe that there are hidden (deterministic) laws beneath the underlying proceses, and theses laws are expressed themself through visual patterns to some degree.
...that is close, very good, but IMO FWIW use of the term stochastic is questionable. My math and science eduation is 35 years behind, but IMO there is no true randomness except at the quantum level. Even chaotic systems, which are widely misperceived to be stochastic, are totally deterministic but look random because of the exquisite dependence on initial conditions of the solutions to their simultaneous nonlinear ordinary differential equations. Therefore I would say that quants find statistical evidence of exploitable deterministic behaviors buried in the noise of a multitude of seemingly noisy unprofitable behaviors. Or some BS like that. And it is BS, because what counts is making money, even if it's just random and you're taking credit for it.
Do you think Merton, Scholes and Meriwether used sit around their office high-fiveing each other screaming, "WE DID IT! WE DID IT! WE BEAT THE MARKET! " ???
...they are somebody and I am nobody, so perhaps arrogance was the wrong word to use. Let me substitute hubris. I think the record, to the extent that what Lowenstein wrote is true, justifies it. Did you read the book? I notice you didn't question the use of the word stupid. Best regards.
...please accept my most profound apologies on the offensiveness of my post. It is very tedious dictating to the monkey who actually does the typing by ticking my left eyebrow. Sometimes he gets impatient and completes my thoughts for me, or makes unauthorized editorial changes. I am unable to stop him, as he bites me when I try. He is developing into a pretty good TA trader, though, much to my amazement. The more colored lines I put on the screen, the better he does, especially if they are so thick and intertwining that he cannot even see the price.