What are Trading Models?
Trading models are quantitative approaches that use statistical and mathematical techniques to make predictions about financial markets and assets. These models attempt to identify patterns and relationships in market data, which can then be used to make investment decisions.
In the Investmint app, trading models can reduce exhausting trading efforts to a profitable, single-click routine. They are to traders what a flight system is to a pilot. In a plane, the pilot feeds the input, which results in an output that accounts for multiple variables like wind speed and drag.
Flight systems exist to make a pilot's life easier, helping the pilot stay on route and on time.
That is precisely what a good trading model can do for traders. It will crunch a large amount of data on a given security (or a set of securities) and give out a signal, suggesting timely actions that one can take to execute trades. It makes for an effortless trading experience.
In technical terms, Models are a set of rules based on which signals are emitted to the traders. Data from the markets is fed to train them, post which their performance is measured to analyze their efficacy. These signals then indicate optimal trades for selected trading security, actionable within a defined period of time.
The rules are structured to remove some guesswork inherent to trading and investing in the market. Often Models work by having strong underpinnings in trading concepts while defining the risk parameters for their use case. Thoroughly tested data-driven models can become a framework for executing successful trades.
Did You Mean Trading Strategies?
Trading models are related to but, at the same time, quite different from trading strategies. A trading strategy is a broader conceptual category, one application of which is a trading model.
Then What are Trading Strategies?
If we define trading strategy as an eligibility criteria for what qualifies as a T-shirt, like basic dimensions and the half-sleeve T-shape. Then a trading model is a particular iteration of the strategy, like a drop-cut or a Chinese collar.
Trading strategies like momentum trading, or gap trading provide a systemic methodology based on an underlying fundamental concept. These strategies are then broadly used to identify and trade securities in the market at the trader's discretion.
Trading models take it a step further by creating an actionable data-driven iteration of the strategy, automating multiple manual steps in the process of trading. These can be used and re-used for a defined period of time and given security.
Who Uses Trading Models?
Usually, high-entry barrier trading institutions like investment banks & funds, hedge funds, and HFTs (High-Frequency Trading) often employ trading models as a small or large part of their trading practices.
For instance, data-driven hedge funds may still employ a manager to make the final decision after receiving multiple signals from their models. While HFTs rely on models much more heavily as trades are high-volume and small margin, being executed in a matter of milliseconds.
At Investmint, we try to bring this superpower into the hands of the everyday trader and investor.
Trading models not only make trading effortless and headache free. They also give better returns when compared to other low-effort investment avenues like SIPs and Mutual Funds.
The CAGR can range from anywhere between 14-70% depending on how aggressive the model or models you choose to invest in is. All models hosted at Investmint are transparent and accessible to everyone.
What is the catch?
Effort. Let us find out exactly why. At the end of the day, what is a model but an individual's belief of how the markets will work? Rules governing a model, no matter how well-researched, or constructed, are defined by human beings just like us.
At this point, the data comes in and does the magic. There is an easy way to understand this:
Imagine it is 13th January 2015. The markets open at 9 am. You are ready with your trading strategies to execute trades for the day. Let us assume you keep following the regimen till this date, noting down the tweaks you have made to improve performance over the years. Will that not make for a reliable framework to trade in?
Constructing that framework is precisely what the data does, except it can run millions of such simulations for a given model in one day. The story does not end there. The model continues to adapt to the many inefficiencies it identifies as it compares its emitted signals against the actual historical data available for a given set of securities in the market.
When the testing is done and dusted, the model is no longer somebody’s idea of how the markets work. It becomes a time-tested, data-shaped shippable framework.
Mind you, it is not a crystal ball that predicts the future, but then again, it remains a framework for which success is as probable as it can be when operating in the securities market.
So back to the point, it takes the effort of a million people to develop a reliable trading model. At investment, we work with SEBI Registered Research Analysts to build models, which are back-tested and then hosted on our servers.
Still curious? Investmint hosts multiple trading models. For a detailed working of Investmint trading models, click here.