QUANTITATIVE TRADING STRATEGIES

THE PIONEERS OF QUANTITATIVE TRADING
Quantitative trading dates back to the turn of the 20th century. W. D. Gann,
Richard Donchian, Welles Wilder, and Thomas DeMark are among its well-known
pioneers.
William D. Gann
In the early 1900s, Gann made his name as a young stock and commodity broker.
A legendary trader, Gann put his ideas and his credibility on the line in an interview
with the Ticker and Investment Digest magazine in 1909 (Kahn, 1980). The
magazine published a four page interview in which Gann recounted his trading
record. His forecasts were incredibly accurate. During October 1909, according to
the interview, Gann made 286 trades in various stocks, 264 of which were profitable
and only 22 resulting in losses.
Although Gann subsequently wrote a number of books, none truly describe
his methods. From what has been published, it appears that his techniques ran the
gamut from creating new price charts based on movement independent of time to
more complex numerology methods, including squares of price and time. Gann’s
How to Trade in Commodities is one of my all-time favorite classics.
Richard Donchian
Born in 1905, Robert Donchian established the first futures fund in 1949 (Jobman,
1980). The fund struggled for the first 20 years, as Donchian traded commodity
CHAPTER 1 Introduction to Quantitative Trading 9
markets with a discretionary technical trading strategy. Having started in the trading
business during the deflationary 1930s, his outlook was continually biased
toward the bearish side. This bias hurt the fund’s performance during many of the
commodity rallies of the 1950s and 1960s. It was not until Donchian quantified
his trading approach in the 1970s that steady profits resulted.
Despite never writing books on the subject of trading, Donchian utilized
techniques that are extremely popular and the basis of many of today’s strategies.
Among his contributions to the industry are the dual moving average crossover
strategy, as well as the channel breakout strategy. I included these two strategies to
contrast more recent systems in my Comparison of Popular Trading Systems.
Much to my surprise, these two systems were among the best-performing systems
tested. We will explore Donchian’s work in more detail later in the book.
Welles Wilder
New Concepts in Technical Trading by Welles Wilder, published in 1978, was one of
the first books that attempted to take discretion out of the trader’s hands and replace
trading decisions with mathematical trading methodologies. Wilder introduced the
Relative Strength Index, an oscillator that is standard in nearly every software package
today, the Parabolic Stop and Reverse system, and seven other methods. His
strictly quantitative methods make him a pioneer in the field of quantitative trading.
Thomas DeMark
After writing a trading advisory service in the early 1980s, Thomas DeMark went
to work for Tudor Investment Corporation, one of the most prestigious Commodity
Trading Advisers in the world. Paul Tudor Jones was so impressed with DeMark
that the two opened a subsidiary, Tudor Systems Corporation, for the sole purpose
of developing and trading DeMark’s ideas.
Keeping the bulk of his trading techniques to himself throughout his trading
career, DeMark, who has been called the “ultimate indicator and systems
guy” (Burke, 1993), decided to give the rest of the world a glimpse of his methods
when he published The New Science of Technical Trading in 1994. A sequel,
New Market Timing Techniques, followed in 1997. If any readers have not read
these two books, I strongly suggest you do so. Testing and evaluating the ideas
in these two books alone might take years for any one person. Among DeMark’s
contributions are his Sequential indicator (a countertrend exhaustion technique),
DeMarker and REI (new takes on oscillators), as well as numerous other systematic
trading strategies.