Trading: Art or Science?

[Liquid validity]

Depends who you ask.

There was a lively discussion on Saturday at my house between...

- A guy who has been spending 8 hours a day looking at Forex charts & MACD, Stochastics etc. and said that he felt he was getting nowhere.

The goal was to show Craig (the chart guy) that he should perhaps consider something else.

Interestingly, Prem had not really seen this 'dirty end' of trading, which is a total discretionary art. Being an academic in the field, he was very interested. We talked at length afterwards and the aspect he seemed to like most was that it was trading based on understanding the market as opposed to mathematical derivatives. Prem has done a LOT of research into the technical aspect of the market and found no correlations between technical factors and future price behaviour. His experience is that you need to understand in order to be able to trade. I agree but I don't think you need to understand (or watch) everything that impacts the market. Analysis paralysis & all that. He does think that volume is key and you can see that reflected in his work.

On the other hand, Prem did find relationships between fundamental factors and longer term performance. I brought up IPOs & lock in periods and he had a wealth of information to hand on how that impacts prices.

Now - this doesn't mean it's not a science or that science cannot be applied. What it does mean is that someone that has carried out significant research in the technical side of the market, doesn't use that to invest his own money, because he found no correlations.

Of course, looking for correlations in technical information means taking a mechanical approach. This is science. On the other hand, using technical information in a subjective/discretionary manner - that's an art.

At the end of the day, my impression was that the guy doing the stuff with forex charts wasn't convinced that the science way - finding an objective solution to the trading problem - was a dead end.

Strangely enough I agree with that
I also believe a purely mechanical approach using indicators is highly unlikely to work.
We all know indicators lag, and that renders most of them pretty much useless in a conventional application.
They can give the illusion of working if experienced discretion is used, in truth
its probably more of a crutch.

A glorified coin flip is a better and more consistent approach on the science side.
Then you have the insti quants and all that jazz, more science again.
Not the science of the market - there is none there.
Its purely the science of randomness and probability.

To trade the market itself, then yes its an art or skill.
Yet despite all that, either way can still make money or lose money...
Without sound risk management, either way will fail.
I'd be hard pressed to describe risk management as an artform.
Therefore I'd say trading is the science of random probability risk management.

Simon Kerr talks to David Harding - The Hedge Fund Journal
David Harding says it much better than I could anyway.

 

[DionysusToast]

Pete, say hi to Dale for me next time you see him.
I hope he's still winning well his battle against you-know-what ......

G - he's over the cancer - beat it hands down, lost a LOT of weight and is pretty healthy now.

He does have a new battle - working on his 4th divorce....

 

[VielGeld]

It is my intention to convert him to the dark side. We agreed to cement our friendship by going for a vasectomy together. That could have been the Heineken talking though...

Omfg, this made me snort my omelet through my nose...

-----

Anyway, is trading art or science? In my limited experience, it's both, though it can also depend on type of trading.

I mean, if you're running HFT/Quant/Algo/Global macro stuff, then it's probably more a science, of course, since you're doing a ton of analysis and stuff. I doubt technical analysis figures in this since that's really a retail trap (though BBmac is the wild exception to this, having made an art out of his science).

But if you're discretionary, it's more likely to be art. Discretionary is almost entirely based in experience. The more experience, the better, though it doesn't guarantee anything.

Maybe some have elevated their trading to an art, and have been wildly successful. Though the very same could be said of the science-y side as well. Both have merits.

 

[alphadude]

Strangely enough I agree with that
I also believe a purely mechanical approach using indicators is highly unlikely to work.
We all know indicators lag, and that renders most of them pretty much useless in a conventional application.
They can give the illusion of working if experienced discretion is used, in truth
its probably more of a crutch.

A glorified coin flip is a better and more consistent approach on the science side.
Then you have the insti quants and all that jazz, more science again.
Not the science of the market - there is none there.
Its purely the science of randomness and probability.

To trade the market itself, then yes its an art or skill.
Yet despite all that, either way can still make money or lose money...
Without sound risk management, either way will fail.
I'd be hard pressed to describe risk management as an artform.
Therefore I'd say trading is the science of random probability risk management.

Simon Kerr talks to David Harding - The Hedge Fund Journal
Simon Kerr says it much better than I could anyway.

LV; i disagree there.

from my experience: I trade 100% mechanical quant strategies; that are based purely on science. Art does play a role and comes in two forms:
- creativity in brainstorming and quant research
- monitoring mechanical trading systems in live markets; and intervening in extreme situations (i.e. earch quakes, flash crash..etc)

There are many real life examples of successful quant funds who are 100% mechanical; i.e. Jim Simmons, David Shaw, Dennis Richard, Bill Eckharts..etc.

 

[deadbroke]

Please articulate as much as you wish.

Trading is like Virginity, "one prick, all gone"

 

[Triggerfish]

Trading is neither Art or Science.
Art is an interpretation involving creativity and provoking emotions so to express ones point of view.....but art does not know.
Science is to organise knowledge so to explain what it is.....but again it does not know.
If one knows, one does not need Art or Science to justify what it is.

Trading is a business, in fact, it is a War for profits.....

 

[Joules MM1]

for mine, the premise of the thread is wrong, the correct question for immediacy is; what part is science and what part is art?

I say immediate, because, despite the incumbent waffle that comes with these threads, trades are an immediacy

a fully quant system cannot originate soley from a mathematic and must come from the origins of artful proposition, an auto system, an EA, is also a system that is reliant on artful proposition in its make-up and that development never throws away the original proposition no matter the final make-up, flawed, successful or otherwise

not matter the source for a trade decision, the origins contain an extent of artful thought and rigour of math ......at least that's true for some of us........

the brain is such that it can make salient ideas or strategies on the run, from a mathematic, while we consciously are not aware of our capacity to artfully input that science which, imho, is what we sometimes refer to as experience......

careful with that axe, Eugine.......there's fine line tween autistic and

 

[Liquid validity]

LV; i disagree there.

from my experience: I trade 100% mechanical quant strategies; that are based purely on science. Art does play a role and comes in two forms:
- creativity in brainstorming and quant research
- monitoring mechanical trading systems in live markets; and intervening in extreme situations (i.e. earch quakes, flash crash..etc)

There are many real life examples of successful quant funds who are 100% mechanical; i.e. Jim Simmons, David Shaw, Dennis Richard, Bill Eckharts..etc.

Not sure what you disagree with?
I know about Simons etc.
David Harding is in the same field and heads Winton capital:
https://www.wintoncapital.com/

I'm not arguing for or against either approach.
Both can clearly work.
Both can also fail.
Its a personal choice based on the pro's and con's.

The point I'm making is best summed up here:
http://www.trade2win.com/boards/trading-journals/147420-outliers-talisman-6.html#post1823662

Any science in algo trading is just providing a probability based reason for entry.
I use an automated coin flip in Ninja so I'm not knocking that method at all...

 

[Mike Kshemaraja]

Traders are not born, they CREATE themselves, great traders are simply the one who has made a habit of self-development, in any aspect that is required.

 

[BeginnerJoe]

Traders are not born, they CREATE themselves, great traders are simply the one who has made a habit of self-development, in any aspect that is required.

See if you can create yourself as a great artist, or great general, or great politician, or great writer. All those things can bring you as much money, if not more, as being a great trader. Why limit yourself this way ?

 

[The Leopard]

Art for me. Can't speak for others though.

 

[Mike Kshemaraja]

See if you can create yourself as a great artist, or great general, or great politician, or great writer. All those things can bring you as much money, if not more, as being a trader. Why limit yourself this way ?

Passion is the key,which generates creativity, money is not the issue, but will follow. Excellence through passion.

 

[bbmac]

Passion is the key,which generates creativity, money is not the issue, but will follow. Excellence through passion.

or maybe neccessity is the mother of invention/creativity ? I agree though passion helps.

G/L

 

[BeginnerJoe]

Passion is quite useless if it doesn't bear fruit. Although, it's not a problem if you are still young and everything looks possible.

 

[Mike Kshemaraja]

Passion is quite useless if it doesn't bear fruit. Although, it's not a problem if you are still young and everything looks possible.

Which one is the fruit? Money? Then you have not passion for trading . Find what you are passion about and serious money will follow if there is money to be made.

Keep in mind that not everyone will be able to find out what they are passion about.

Gattuso, one of the less skilful football players yet very few have won as much as he did, Why? Passion. He would play even for free.

This is his last day as a soccer player with AC Milan, yesterday. Passion is pouring out of his ears.

Also age is only a mental state.

Anyway this is only my perception of things and are not necessary true for everyone.

 

[BeginnerJoe]

The fruit of passion in football is goals. The fruit of passion in trading is money. If you don't even know what the fruit/goal is, you are unlikely to get it.

 

[Mike Kshemaraja]

or maybe neccessity is the mother of invention/creativity ? I agree though passion helps.

G/L

Yes, could be in some cases. And I think here we are start to engage in more
profund and fundamental issues which are a necessity to bring once level a step further.

Keep it up, with the level of your posts mate. I find them expansive and relaxing.

 

[Mike Kshemaraja]

The fruit of passion in football is goals. The fruit of passion in trading is money. If you don't even know what the fruit/goal is, you are unlikely to get it.

The passion in football is playing, interacting, the goal is only a consequence of how good you are at that,
the passion in trading is understanding the motivations and psychology of the masses and money is a consequence of it.

 

[new_trader]

Please articulate as much as you wish.

More art than science.

 

[arbus]

Science. For me

It is all about testing a hypothesis.
I will put any crazy system idea into code.
Backtest it, forward test it, improve it...

Automating a system can show you if will really work or not. No art, or feelings, etc...

I have 100's of failures by the way.
Just a few outstanding systems.