QUANTIFIABLE DATA
One of the first things a strategy trader needs to understand is quantifiable data.
This is the data that he will correlate to the market and use to develop his trading
strategy. Without quantifiable data, he would be unable to trade a strategy.
Quantifiable data is measurable data. Stock and commodity prices are
quantifiable, as is volume. All technical indicators that are derived from price
and/or volume are quantifiable and useable in designing a strategy. Are phases of
the moon quantifiable? Yes, as are the location of the planets. They occur in a
regular pattern, and each occurrence is measurable and predictable. What about
earnings per share or the price earnings ratio of stocks? Yes. These are also
quantifiable and can be used in strategy trading.
Once you understand what quantifiable data is, it is easier to spot non-quantifiable
data. Non-quantifiable data usually consists of random events that cannot be
reduced to a number and that cannot be predicted. For instance, speeches by
politicians are not quantifiable, although we know that they can have a profound
effect on stock prices. Opinions of our broker are not quantifiable. Are earnings
surprises quantifiable? No, but quarterly earnings reports are, and they usually
have a significant effect on stock prices. Are weather patterns, droughts, or
freezes quantifiable? No, although we know they too have a considerable effect
on commodity prices, it is not possible to quantify droughts and correlate them to
Soybean or Corn prices.
A strategy trader thus moves into a mode of acquiring and testing quantifiable
data as it relates to historical price activity. This is a marked difference from a
technical trader, who tries to correlate data to price but usually through
observation and intuition, and from the discretionary trader, who doesn’t use
quantifiable data at all or feels he needs to in order to make money.
It is this acquisition and use of quantifiable data, along with the software to test it,
that enables the strategy trader to investigate trading techniques historically and
begin to put some rational and enlightened business practices to use in his trading.
It is this process that enables him to start finally making money.