In quantitative trading, it is crucial to define an objective function in the design, testing, and validation of trading systems. If your price has been kept low over time you will soon discover a large loss. Many believe in buying more products rather than liquidating. By back testing what effect the stop-losses have had on your strategies, it’s usually found that there is a decrease to your overall returns and sharp ratios.   

What this View Leaves Out
The view above leaves out the fact of black swan events and the survival bias. Normally one would trade only the price series that have a mean-reverting type strategy only upon seeing the prices eventually reverting. No one would want to trade the price series that no longer mean-revert. If we believe that stop-losses are not good for mean-reverting strategy and will not last in our process of selection, we would be partially wrong.

If you look at black swan events that did not happen in the back test time, such as that you did not have a loss that added up to 20% in one day, it will not have an effect on the back test performance. There is no guarantee of it not happening in future and if this is not something, you want to happen impose it as a stop-loss.

Decide what stop-loss to use that will have the lowest effect on your back-test performance.

To protect against any risk, here are some steps for quantitative risk management.

Organize – Organizational process assets mean information taken from your projects archives and used on a similar project.

Statement of Project Scope- a Project Scope Statement will give you information about whether or not your project is worthwhile. Whether it is new and will be an exciting endeavor. These types do have a higher risk factor.

Risk Management- a Risk Management Plan should have your budget included, as well as definitions of impact, what risks there are, timing for those risks and a schedule.

Register Risk – A Risk Register needs to lists any opportunities as well as any threats and should be a priority.

Project Management Plan – This needs to include the cost management plan and the project management plan with details of how to control it and how much it will cost.

To analyze data, one needs to use quantitative methods, which will give a range of statistical and mathematical techniques. These include a vast range of documents, participant observations, unstructured interviews, and primary data.

To analyze the data one must be able to describe it and put it into a structure. The choices vary greatly and are important in setting out in trade.

Quantitative Finance Collector is a blog on Quantitative finance analysis, methods in mathematical finance focusing on derivative pricing, quantitative trading and quantitative risk management.

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