The Importance of Return Distributions

When designing a strategy, I like to observe the probability distribution of the asset I plan to trade. It yields precious information on the behavior of the underlying and can also help identify the market regime in effect for a given period.

Of course eyeballing the probability density curve or the empirical cumulative distribution can work, but from a quantitative trading point of view, it does not really help; we want something more mechanical that we can rely on over and over. The answer is quite simple; simple curve analysis can give us the mechanical capability we are looking for. Data on the mean, median, skew, kurtosis, etc. of a distribution can all be fed as parameters to be analyzed in a trading system.

We don’t have to use this technique uniquely on raw return data, it is often helpful to know how a given indicator or strategy affect the return distribution. A comparison between the raw return distribution and one processed with signals from a strategy can help indicate whether the strategy is traded with the right bias for the current market regime or if a strategy is suddenly diminishing in profitability. Furthermore, for the daily swing traders amongst us, probability densities analysis can help us see if our indicators really help mitigate daily MR.

Finally, distribution analysis can be an extremely valuable tool when developing adaptive strategies. It provides a strategy with instant feedback on its performance and its effect on the return series of the underlying; taking that in consideration can be a good base to build on when designing your own adaptive algorithms (more on that later..).




I have no qualms about accepting a useful idea merely because it wasn’t my own.” ~ Thrawn

In this short post, I want to acknowledge the blogs and people (in no particular order) who motivated me to start the Quantum Financier blog. I am a big fan of their work and of their blog, so a big shout-out to you gentlemen.

David Varadi of CSS Analytics

Michael Stokes of MarketSci

Max Dama of Max Dama on Automated Trading

Joshua Ulrich of FOSS Trading

Rob Hanna of Quantifiable Edges

and finally the Quantivity blog


Welcome to the Quantum Financier Blog

This blog will contain the results of my research and the things I am currently working on. For now,  I expect my posting to focus on applications of machine learning, mathematics and quantitative methods to develop automated trading strategies. My ultimate goal is the creation of adaptive investment strategies that “think” and “analyze” the market and evolve accordingly.

When reading my posts, keep in mind that I am only a student and that my goal is to learn as I post, I will make every effort not to make mistakes when posting but it might happen. Regardless, I look forward to receive feedback and comments on the content of this blog and to discuss the ideas posted.