Has anyone out there ever skinned a cat? I didn’t think so, but surely someone, somewhere, sometime in the past has skinned a cat, otherwise how would we know that there is more than one way to do it. Well, even if no one really does skin cats, in the world of trading, there is more than one way to make a buck, which is a rich irony.
The myriad and diverse approaches to making money in the market are both a testament to the creativity of man and a curse for those who are struggling to find their way. Creatively speaking, one can travel the gamut between highly sophisticated, formulaic systems to simple in and out strategies (my camp). On the cursed side, I understand how frustrating it is for someone starting out to find a gazillion voices clamoring about the true path to success. My thinking on this derived from another article in Futures, “Trading’s Holy Grail: Your Calculator.” Below is an excerpt from the opening paragraphs.
Becoming a successful trader is a challenging journey. The odds of success are stacked against the each individual from the beginning … Unfortunately, most traders start off focusing on the wrong piece of the puzzle. They work diligently trying to identify the perfect setup and entry point with little or no regard for what it really takes to succeed. If folks are fortunate enough to survive the first year or two, they ultimately learn that trading is simply a numbers game. Stated differently, it is all about the math.
One would be pressed to find fault with any of the above, especially if one is of the camp that espouses successful trading is all about mathematical systems, as the author of the Futures article seems to be. The formula in the article lays it out more simply.
Successful trading = understanding the math + a robust trading plan + discipline
Although I don’t even come close to being a mechanical, mathematical trader, I do appreciate the art and science of it, and I certainly cannot fault the approach as not successful, as many traders who utilize mechanical, mathematical trading are successful. No, if I have a quibble with the above it is found in my belief that markets are about people, and, in the trading approach defined in the article, I do not see a mention of this aspect to trading at all.
More specifically, trading a market pits you (a person) against the collective consciousness of all its participants (people). The human element does not exist in the abstract context of patterns and mathematical probability. It is all about the numbers, and this can work over time, as patterns do repeat, and probabilities do pay off. But, as the author points out in the simple formula, discipline is key. You have to put your plan in place over and over again, without deviation, relying only the predicted probability of success, which is defined from back testing and forward testing your particular set up.
Now here is my rub with all of this. This approach assumes you are as mechanical as your system, and that the market is not subject to irrationality in any given moment. Well, are you a robotic trader? Can you, without emotion, execute your setup repeatedly, especially in the face of, say, six, eight, ten losses in a row, which can and will occur, since the irrationality of the market will break whatever patterns do exist? Predictably, I might add.
Trade in the day; invest in your life …
