Trading attracts certain types of people, and one of the most common is “the Engineer”. Now in reality they may or may not actually be any sort of engineer, but it’s mostly about the type of mindset. These people are often highly educated, and highly intelligent. They may have tremendous skills in math, statistics, probabilities, data analysis, and various other highly numbers-oriented disciplines. And in fact it’s precisely this high intellect and affinity for numbers which both draw them in, and lead them to ruin.
See, the markets aren’t actually about numbers. Sure numbers are a huge component as they’re one of the primary ways we measure what’s going on (and certainly how we measure our results!). But markets are actually made up of people. Even an algorithm executing against code, was dreamed up, designed, and implemented people. And because there are people involved, things are ultimately unpredictable. We do our best to anticipate, but genuine prediction is a really bad idea because humans simply aren’t rational actors.
Which brings me, to you. You, every one of you reading this right now, are not special to the markets. OK maybe you run a billion-dollar hedge fund and actually are somewhat special. But I doubt it. Assuming you’re a retail trader in regular trading hours with a reasonably liquid instrument, you just don’t have any real power in the markets. Your orders aren’t going to get a reaction, you’re not going to influence things with your 5 or 10 lot. We’re plankton amongst minnows amongst sharks amongst whales. And those “bigger fish” don’t even know we’re there.
Now, back to the really smart people (so, uh, not me… lol). It’s pretty common to run into people with those heavily academic backgrounds who think that they can outsmart the markets. That, despite being woefully undercapitalized, they can still beat the markets with their superior strategy, algo, etc. They tend to have figured out some brilliantly clever never-before-dreamt-up thing that will easily just go in and hoover up all kinds of money without any risk. They love things like backtesting, they definitely love their indicators, and they think the solution to everything is just automating the strategy because the only problem is the human at the controls. Eliminate the human, and you can’t lose! Right?
Of course eventually they run face-first into the brick wall of reality, as they discover things like curve-fitting, survivorship bias, cherry picking, and all kinds of other really bad data-oriented habits.
Speaking of which… here’s a cool article to read after you finish this one.
Long story short. It doesn’t matter how brilliant you may be, how powerful your PC, how clever your code, how superior your software. You aren’t special. The market is ultimately fair because the most capable survive, and the rest don’t. Nothing could be fairer. So if you really want to “win” in the markets, you need to stop looking externally and look inward. All there is, is to “get good.”
Finally a touch of gamer geek humour for you. This video perfectly encapsulates my closing point. It’s referring to playing video games, but really what is trading in the electronic age if not the ultimate video game? Enjoy!
Until next time, get good!
Jonathan van Clute
Community Manager, Trading Research Group