There are many different ways to analyze a stock or investment. Many people use one of the two most popular ways: fundamental analysis and technical analysis. One way provides you with a look at the health of the company and their financial performance, while the other takes a look at past price movements in an attempt to predict future movements.
In the trading world there is a lot of debate back and forth about which is better. I always say that the only wrong analysis is the one that costs you money. I do get the question often about other methods as well, so today we will talk about quantitative trading.
For just a moment, let's strip away the fundamental pricing information and turn the charts off. There is another way to build a portfolio of investments: quantitative trading.
Basically what quantitative trading tries to do is use a big basket of math to build a series of investments that will behave a certain way. Here's an oversimplified example: let's assume that a trader wants to participate in energy stocks. He wants to get the same performance as oil, but he doesn't want to buy oil directly. So he takes a look at all the stocks in the sector and sees that one moves at a pace that is equal to 60% of the price of oil. Now all he needs is an equal, notional investment in a stock that moves 40% of the price and he will have diversified over two stocks, but get the performance of oil.
Another more detailed way traders use a quantitative approach is with the use of options. If a trader has no opinion about market direction and wants to make a certain amount a day on his portfolio, he can first sell an out-of-the-money call option on a particular investment. He can then sell an out-of-the-money put on the same or another investment, but with the same delta as the short call. All things being equal, his portfolio will gain some amount per day (time decay / theta), but his portfolio will essentially be neutral, with no bias to the market direction.
In both examples there was no need to use a chart or look at earnings reports. The trader simply starts with what he wants and then takes a quantitative approach to building that position.