A Doubtful View of Quantitative Trading

So far I’ve only posted one serious post about trading. I can’t get that excited about much of what’s written on the subject and that includes what I’ve started to write. In truth I think the most important element in trading is you. No matter what method you use, ultimately you are the sole determinant of success. Even if you totally automate trade selection and entry, and use adaptive systems to cope with changing conditions, it’s still you that chooses the components (which express your views of how the market works), you that decides whether or not to continue using what you created, and you that decides whether you can handle the way it trades.

Mechanical systems work until they don’t. Super-intelligent robots may one day prove the fallacy of free will by demonstrating all human action is the result of a completely deterministic process that can be accurately forecast, but until that time quantitative methods are doomed to eventual failure, whether in economics or trading, because human decisions are not stable processes like interactions with inert materials. If you hit engineered concrete with a hammer 10 times it will behave roughly the same way each time, but if you try to hit a human 10 times with a hammer one of you is likely to end up dead. Similar results will eventually be achieved with any strictly quantitative method of trading.

Even at 6 months of age humans begin to develop a theory of mind to understand, predict and manipulate the actions of people around them. So what better tool to predict the actions of fellow market participants than the human mind, optimized by a million years of evolution to infer from the past and present what the other guy is going to do in the future?

I love number crunching and cool charts as much as anyone. But I think in actual practice everyone is an intuitive/discretionary trader, differing only at what point in the trading process and under what conditions that input enters, and the degree to which subjective input is embraced. At some point the subjective enters into the process for everyone, so rather than focusing so much time and energy on the quantitative I think most people’s time would be better spent understanding their internal milieu, what input is needed for an accurate intuition, how to identify a valid intuition, and what conditions throw a wrench in the works.

What’s needed is a quantitative approach to qualitative, subjective decision-making. More on that later.


5 thoughts on “A Doubtful View of Quantitative Trading

  1. Pingback: Thursday links: playing played out trends | Abnormal Returns

  2. Pingback: A Quantitative Approach To Intuitive Trading – Part 1 | Mortality Sucks

  3. Pingback: Pseudo Random News and Comment | Mortality Sucks

  4. Pingback: A Quantitative Approach To Intuitive Trading – Part 1/5 [Revised] | Mortality Sucks

  5. Pingback: Pseudo Random News and Comment | Mortality Sucks

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