Trading: Art or Science

[Joe Ross 10]

I believe trading is far more an art than a science. For one thing, if trading were a science, then we should all be able to enter the same trade at the same time, and exit at the same time, getting identical results. We all know that just isn’t so. Yet if trading were scientific, we should be able to get identical results by doing the same thing. I believe such expectation describes the “scientific method.”

 

In addition, if trading were scientific, we should be able to come up with a “get rich” formula that would work all the time. We could then all retire and never have to work again. We all know this isn’t so either.

 

When we, as traders, make a trading decision, most of the time we do not fully know why we are making that decision.

 

You look at a market, you think about taking a trade in that market, and at some point you pull the trigger. You have thought of dozens of things in the time interval leading up to your entry. If I were to ask you, "Exactly why are you buying what you are, or why are you selling what you are?" you would probably not be able to give an accurate answer. You may be able to give a few reasons, but it will most likely not be the full answer. A lot of your decision to enter is subconscious. You do not really know why you entered, especially if you are day trading. To that extent it is more an art than a science, because you cannot fully demonstrate why you are doing what you are doing.

 

But you could say, "I fully know what I'm doing. I am taking the trade because I am following the signals of my method or system." Wonderful, you have just proved my point. When you are blindly trading signals from a method or system, you truly don't know why you are taking the trade. You are essentially acting like a robot, pre-programmed to follow signals whether or not they make sense.

 

I am not disparaging trading that way. If a method or system produces winning results, then what you are doing is following a statistically proven plan. All methods and all systems are based on statistics. The odds on any single trade are never more than 50% win or lose. However, the probability for a succession of trades is quite another story. If you are trading a method that wins seven out of ten times that you enter, and the method has produced a loser three or four times in a row, then the probability for a successful trade increases each time you enter the market. Sooner or later, over a series of trades, you are going to have the result of seven winners against 3 losers. That is statistically valid; however, it is not exactly rocket science. You will have proven that trading is an art — the art of following a statistically valid plan.

[Guest TRex]

Successful, consistent trading is neither an art nor science. For me, it is applying a method proven over time that puts the probabilites of success in your favor, also known as an edge. Every time I make a trade--and I only daytrade--I know precisely why I do it. Subconscious or "feel" has no bearing on my decision. It is much the same as the casino whose edge works in its favor against the players in the long run.

[Dogpile 10]

Science is having a firm grasp of the statistical tendencies. The art is right-brain pattern recognition -- synthesizing patterns across timeframes in real-time.

 

Very similar to Poker in this regard. There is 1) the math 2) the betting pattern and 3) intuition. Some poker players are good and you don't know how they do it without the math -- but they do. Other players are brilliant mathematicians and get by because they are so good at that - even though they aren't even average at the intution. But most of the top players are very good because they understand the science and the art of the game.

[Reaver 10]

A good trader preys on predictabilty.....the name of the game is figure out what your opponents are going to do. A captain obvious is going to get eaten alive.

[Joe Ross 10]

Great points All. Thanks for your posts. I appreciate them. What it amounts to is that with all of our posts, we have proven that trading is not science.

[Soultrader 12]

It is very interesting how all of us seem to have a different way of viewing trading. As a purely discretionary trader, my trading is 100% an art off. Whether I enter purely through tape, "tests" of LOD/HOD, "test of previous day high/low, retracements, trendlines, breakouts, etc... all entry criteria boils down to my understanding of short term market direction at that moment in time. I dont follow a mechanical discretionary system. This keeps me flexible in taking a variety of trades based on market condition. Nor am I restricted to just a few setups. But the key here is to really understand the profile of the markets, momentum, relative strength vs weakness, internals, etc...

 

This is why trading is more of an art form for me. Almost every trade is a "feel"... whether it be through understanding of the tape or through concept trading. Which is why I do not think my style of trading can become automatic like TRex pointed out in applying proven methodologies over and over again without the "feel". Of course I know exactly why I placed the trade and why I would pass on particular trade.

 

I really think trading success is not dependant on what setup you take. (well... having a basic understanding of trading is enough) What matters the most is your own pyschological and emotional control.

[weiwei 10]

Science or Art, I think it depends on who you are. which one are you better at? Some one can feel the market market and trade with it, Like Soul on above post. And some can use scientific approach to collect numbers and do well with it.

 

Market acts in a many different forms, Some time it is in a linear form, which allow system traders to profit. Sometimes it act in non-linear form, so other can take money away from system traders.

 

If market can be programmed then making money with market will be too easy for those who can. But so far people are still search for Holy Grail, so I would conclude it is not possible yet.

 

Finding a style that fits you is what is important, In science or art from.

[feb2865 10]

When I started I use a scientific approach on my trading. The market proved to me otherwise. Markets are so dynamic that it's impossible to mold it or cast it into any shape, size or form. But I guess this is something you must learn by experience. Just look at he the floor. Who the hell is gonna make money there when you have so many people pushing themselves around screaming at the top of the lungs? What "Scientific approach" you will use??? none

 

I tell you me and my "scientific approach" got crushed the first 1/2 hour I started on the pit back in the day.

[Reaver 10]

When I started I use a scientific approach on my trading. The market proved to me otherwise. Markets are so dynamic that it's impossible to mold it or cast it into any shape, size or form. But I guess this is something you must learn by experience. Just look at he the floor. Who the hell is gonna make money there when you have so many people pushing themselves around screaming at the top of the lungs? What "Scientific approach" you will use??? none

 

I tell you me and my "scientific approach" got crushed the first 1/2 hour I started on the pit back in the day.

 

 

Exactly...the way I see it...in science, a computer has the indisputable edge. Period. There is no one that can consistently out calculate a computer. Therefore the only logical thing to do in order to obtain an edge for yourself, is to rely on characteristics a computer does not and cannot have- discretion, art, perception, and intuition. Only play ball on your court, by your rules.

[mea 10]

Plesase refer to answers sections.

 

I believe trading is far more an art than a science.

 

Answer: I disagree.

 

For one thing, if trading were a science, then we should all be able to enter the same trade at the same time, and exit at the same time, getting identical results.

 

Answer: Correct

 

We all know that just isn’t so.

 

Answer: Incorrect

 

Yet if trading were scientific, we should be able to get identical results by doing the same thing.

 

Answer: Correct

 

I believe such expectation describes the “scientific method.”

 

Answer: Correct

 

In addition, if trading were scientific, we should be able to come up with a “get rich” formula that would work all the time.

 

Answer: Both correct and incorrect

 

We could then all retire and never have to work again.

 

Answer: possible

 

We all know this isn’t so either.

 

Answer: you mean, you believe it isn't so.

 

When we, as traders, make a trading decision, most of the time we do not fully know why we are making that decision.

 

Answer: Incorrect

 

You look at a market, you think about taking a trade in that market, and at some point you pull the trigger. You have thought of dozens of things in the time interval leading up to your entry. If I were to ask you, "Exactly why are you buying what you are, or why are you selling what you are?" you would probably not be able to give an accurate answer.

 

Answer: Incorrect

 

You may be able to give a few reasons, but it will most likely not be the full answer.

 

Answer: Incorrect

 

 

A lot of your decision to enter is subconscious.

 

Answer: Incorrect

 

You do not really know why you entered, especially if you are day trading. To that extent it is more an art than a science, because you cannot fully demonstrate why you are doing what you are doing.

 

Answer: Incorrect

 

But you could say, "I fully know what I'm doing. I am taking the trade because I am following the signals of my method or system."

 

Answer: Correct

 

Wonderful, you have just proved my point.

 

Answer: Incorrect

 

When you are blindly trading signals from a method or system, you truly don't know why you are taking the trade.

 

Answer: Incorrect

 

You are essentially acting like a robot,

 

Answer: correct

 

pre-programmed to follow signals whether or not they make sense.

 

Answer: Science has proven them to "make sense" or be successful at least 85-90%.

 

I am not disparaging trading that way.

 

Answer: Yes, you are. Since you cannot figure it out, you try and find ways in your brain to prove it incorrect.

 

If a method or system produces winning results, then what you are doing is following a statistically proven plan.

 

Answer: Correct

 

All methods and all systems are based on statistics.

 

Answer: Correct.

 

The odds on any single trade are never more than 50% win or lose.

 

Answer: Incorrect

 

However, the probability for a succession of trades is quite another story.

 

Answer: ok, what's your point?

 

If you are trading a method that wins seven out of ten times that you enter, and the method has produced a loser three or four times in a row, then the probability for a successful trade increases each time you enter the market.

 

Answer: Incorrect

 

Sooner or later, over a series of trades, you are going to have the result of seven winners against 3 losers.

 

Answer: Incorrect, science has proven a system to more profitable than not, regardless of number of trades or any particular ratio you intend to use.

 

That is statistically valid; however, it is not exactly rocket science.

 

Answer: Incorrect, it is scientifically proven.

 

You will have proven that trading is an art — the art of following a statistically valid plan.

 

Answer: Incorrect, science has proven trading can and should be scientific.

 

In conclusion, art as a method of trading, is guessing and gambling. I don't do either. Thus, I never gamble at casinos. As the odds are in the houses favor, unless your a professional gambler with a scientifically proven "edge" or advantage over them. Hence, the reason a choose to trade, as I'm the house, and the odds are in my favor which were proven scientifically.

[Guest TRex]

There is one flaw in the trade like a casino theory.

 

Casinos have a build in mathetical edge--a pure irrefutable, statistical advantage over the player on EVERY decision. (I'm not taliking about blackjack card counters who might eeek out a small advantage, ie. a lot less than 1.0%.) There is no such thing as a professional craps, roulette, baccarat, pai gow player. Those games are negative expectancy and cannot be beat in the long run by the player (that's not to say the player can't get lucky and have a short term win, but over time that player will lose).

 

The very best professional traders can profit on 80% of their trades, but those trades or setups if you will, can fail at any time and cease to perform as they did in the past due to an adjustement in market behavior. just witness the increase in volitity in August. The market annihilated the pivot and S/R traders as no levels were respected by the market. Regardless if one is a quant or discretionary trader, the "science" failed. Why, because it really wasn't science in the first place. It may have been high probability trading, but it is not and never will be an edge like a casino.

 

So, the casinos don't have this issue. Their "market conditions" never change and the odds on their games remain constant on EVERY single roll of the dice, spin of the wheel, or turn of the cards Think of a casino as a giant toll both that extracts a small but constant piece of the players bankroll.

[Dogpile 10]

I think we have to distinguish between quant strategies you are reading about in the news and writing quant strategies in Tradestation (or a similar software platform).

 

the quant style to trading (scientific) as a general rule (that is in the news today) is playing off mispriced relationships between securities - not directional movement. I am sure they have 'biases' on directional movement but having read many of the books on LTCM and hedge funds and from talking to those who quantitatively trade options for a business (my brother in-law) -- most of these strategies are simply 'relative value' trades with no directional exposure --- put on in huge size. ie, you buy options that are trading with 28.6 implied vol when the entire options chain on the same security is trading at a 31 implied vol. you instantly hedge it by shorting the underlying. you are letting the market tell you how it is pricing the options (the volatility expectation) and you are buying options at a discount to this and locking in the 'edge'.

 

essentially, you are arbitraging securities whose spreads are wider than the underlying characteristics logically suggest. ie, selling October calls and buying November calls on the same security. I am not saying this strategy is guaranteed to work as it requires 'dynamic hedging' (essentially re-balancing your weightings as changing price can exponentially change the characteristics of a derivatives instrument)-- I am just saying that this is logically sound strategy that is 'expected' to work and exposure to 'shocks' can be neutralized to some degree.

 

LTCM did many monster trades on buying the treasury bond expiring in 29.5 years and funding the purchase by shorting the security expiring in 30 years. hard to logically argue that these securities are much different.

 

let's be clear, good arbitrage strategies work. the problems arise when everyone has the same quant strategy on and everyone is using heavy leverage and are therefore forced to liquidate mispriced securities. this is when things go haywire --- and what happened in 1987, 1998 and last month.

 

now, writing quant strategies in Tradestation or similar programs is generally not about arbitrage -- its about finding small biases regarding location and future direction. this is necessary to understand biases to exploit and make a living off the 'big moneys' crumbs.

 

we have been in the 'information age' for a long time now -- I agree with some recent authors that hypothesize that we are entering the 'conceptual age' --- where computing power is becoming commoditized. in my opinion, trading strategies are optimally executed by augmenting statistical strategies in conjunction with using the right side of the brain too (pattern recognition, synthesizing timeframes, and 'intuition').

 

but good quant strategies will continue to work -- and 'me-too' quant strategies joining the party late on what 'was' a good quant strategy will clearly have to fail big-time as the best quant strategy-writers will figure out a way to fade their own strategy when its gets too popular. we will be hearing about these guys probably over the next year.

[Dogpile 10]

"The market annihilated the pivot and S/R traders as no levels were respected by the market. Regardless if one is a quant or discretionary trader, the "science" failed."

 

what? many of the hybrid quant/discretionary traders I know had their best month of the year in August.

 

I don't think you can ever say, the 'science' failed. stratgies fail, science does not. for every strategy that fails, there was a strategy that faded the failed strategy. the strategy that worked was based on good assumptions (the science), the strategy that didn't work was based on only a perception of science (bad assumptions). a strategy built on the last X trading years of data might be valid in the future or it might not. traders who had failed strategies simply didn't adjust to the new volatility after an unusually long period of low volatility --- a 'bubble' I would say. if you built your strategy based on the assumption that a bubble wouldn't pop -- and the bubble does pop, I would just call that a bad strategy -- not a failure of science.

 

this is obviously a bigger point but strategies that rely on 'normally distributed returns' and/or 'linear movement' -- and don't properly factor in periods of intense non-linear movement -- will eventually fail. financial markets have been shown over and over again to exhibit 'fat tails'. extreme moves happen more often than one would expect. but this hardly predicts that quant strategies necessarily have to fail -- quant strategies have done extremely well. there is just a point where their own success eventually increases the risk of their own failure as the strategies that are working become widely adopted.

[Dogpile 10]

by the way, there is a hedge fund (Citadel) who apparently has taken the strategy of waiting for inevitible carnage in the hedge fund industry and buying the entire portfolios of blown-up funds at a discount. they are essentially arbitraging the concept that THEY won't be forced to unload mispriced securities since they are well-capitalized... while the hedge fund that is too heavily levered is forced by their loans to sell their mispriced (underpriced) securities (to Citadel).

[weiwei 10]

Just to add to what I said earlier to make it more complete.

 

The shorter the time frame, the harder it is to back test it, in other word harder to get a good quantitative result.(profit) Simply because of there are more noises in price action.

 

Price action is the combination result of many different factors, Fundamental, technical, sentiment, order flows for shorter term trading and others.

 

thus your focus on the cause of the price action will set your brain to If trading is an Art or science, thus determine your approach to the market.

 

After all at end it is the end result that count. Artistic trading style or scientific trading style as long as it works for you.

[mea 10]

Quote by Dogpile

 

I don't think you can ever say, the 'science' failed. strategies fail, science does not. for every strategy that fails, there was a strategy that faded the failed strategy. the strategy that worked was based on good assumptions (the science), the strategy that didn't work was based on only a perception of science (bad assumptions).

 

Exactly, Thank you.

[mea 10]

Please refer to answers section.

 

QUOTE=TRex;18596]There is one flaw in the trade like a casino theory.

 

Casinos have a build in mathetical edge--a pure irrefutable, statistical advantage over the player on EVERY decision.

 

Answer: Correct, and so can trading.

 

The very best professional traders can profit on 80% of their trades, but those trades or setups if you will, can fail at any time and cease to perform as they did in the past due to an adjustement in market behavior.

 

Answer: Correct, and the "edge" or advantage a trader can have is knowing a particular strategy will not be correct in the changing "market behavior" which was proved by science and capitalize on it by utilizing a correct strategy for the market conditions at hand.

 

just witness the increase in volitity in August.

 

Answer: Which means, different market conditions require various strategies which have to be matched to the market conditions.

 

The market annihilated the pivot and S/R traders as no levels were respected by the market.

 

Answer: Which is a sign of changing market conditions and you better have a successful strategy for it or stay on the side lines.

 

 

Regardless if one is a quant or discretionary trader, the "science" failed.

 

Answer: No, the science was applied incorrectly. Meaning, the person who analyzed the market conditions correctly and applied a correct strategy for said market conditions wins, and the person who failed to analyze correctly lost.

 

Why, because it really wasn't science in the first place. It may have been high probability trading, but it is not and never will be an edge like a casino.

 

Answer: Science has proven it can be exactly like a casino analogy, if the science is applied correctly. Just as casinos pay out a small portion of there winnings to the public. So can a trader, hedge fund, investment bank, mutual fund etc. win most of the time and give back very little to the market. Again, if the science is applied correctly.

 

So, the casinos don't have this issue. Their "market conditions" never change and the odds on their games remain constant on EVERY single roll of the dice, spin of the wheel, or turn of the cards

 

Answer: Correct. And, the secret to trading by science is the ability to recognize the changing market conditions and apply the correct strategy for it

 

My posting to you is not to argue or offend you. Rather, quite the opposite. Meaning, to have you as well as all others reading this think "outside the box" and possibly add to your trading arsenal.

 

Also, I have reviewed your site and was able to determine some of your methods, which are valid and I wish you the best in your endeavor.

 

 

Mark

[Guest TRex]

mea, with all due respect to say "the secret to trading by science is the ability to recognize the changing market conditions and apply the correct strategy for it" is a contradiction in terms. I realize we're having an academic discussion, so no harm done.

 

The trading you're referring to would be better called theory, rather than fact, of science. Casinos operate on the mathametical laws which don't change regardless what the player is doing. Their environment doesn't have changing market conditions; and even if it did, any change in the games would still have a built in edge for the casino. The player would be hopeless to win unless by a stroke of luck.

 

Trading will never be a science as long as the market conditions change and traders have to continually adjust to find an edge. What works today can fail tomorrow and so on and so forth.

 

P.s. Thanks for the kind words about The TradingZoo Website.

[feb2865 10]

"the secret to trading by science is the ability to recognize the changing market conditions and apply the correct strategy for it"

 

It sounds discretionary to me

 

Listen folks, this topic is very much like the never-ending story about scaling out, stop-loss, indicators, etc. It becomes a soap opera after a while. Lucky for us, this forum is a well-organized one and traders do respect each to the max.

 

First you need to have a clear definition of what is science - and what is art trading wise. When I started I was sure I had this defined real good. As I mentioned in my earliest post, market proved me wrong.

 

If you have a system/strategy that works and adapts to this ever-changing environment, congratulations. If is an art or is a science - who cares??

 

does it makes you money consistently?

 

I learned that trading becomes very much like a fingerprint for every trader. I have a friend who utilizes MACD and price and it works pretty good for him. I tried once and got screwed up.

 

Everything lies in the eyes of the beholder.

 

I have an open mind about everything. You have a bot that spits dollar bills everytime the market opens, I am willing to try (paper trade of course) I have never make any indicator work in live trading. But that's me, doesn't mean traders outhere are not making money off indicators.

 

Whatever system you use, mechanical, science, art, etc. Please bear in mind that all of them has it's limitations. Learn when your system is telling the truth and when is giving you a wrong signal.

 

In all markets, at all time frames, there will be periods of accumulation and distribution. On whatever your use art/science/astrology/tea leaves etc. would be nice to train your system to spot these periods so you can act accordingly when the market distributes. At least this is how I trade.

 

Systems/strategies...art or science...are just road maps. You still need to drive the car.

[Dogpile 10]

<<"the secret to trading by science is the ability to recognize the changing market conditions and apply the correct strategy for it" is a contradiction in terms. >>

 

no, I don't think it is a contradiction -- it is just differences in timeframe.

 

Art Collins book goes into this. I am not a great programmer by any means but I can easily write a 'switch' into my program that turns on if one environment exists and turns off if another environment exists. the example Art gives is a switch that turns on in anticipation of a momentum move. his system recognizes this to be occuring if you close near the closing high of a 20-day range and the last 5-day high to low range is twice the size of the previous 20-day range. then use a buy-stop at the opening price + X # of pts.

 

just an example of how a mechanical trader can recognize changing conditions in market behavior.

[mea 10]

Dogpile,

 

Thank you for your example and all your help throughout this discussion. I hope someday, I can do the same in return.

 

Mark

[Reaver 10]

"the secret to trading by science is the ability to recognize the changing market conditions and apply the correct strategy for it"

 

It sounds discretionary to me

 

Listen folks, this topic is very much like the never-ending story about scaling out, stop-loss, indicators, etc. It becomes a soap opera after a while. Lucky for us, this forum is a well-organized one and traders do respect each to the max.

 

First you need to have a clear definition of what is science - and what is art trading wise. When I started I was sure I had this defined real good. As I mentioned in my earliest post, market proved me wrong.

 

If you have a system/strategy that works and adapts to this ever-changing environment, congratulations. If is an art or is a science - who cares??

 

does it makes you money consistently?

 

I learned that trading becomes very much like a fingerprint for every trader. I have a friend who utilizes MACD and price and it works pretty good for him. I tried once and got screwed up.

 

Everything lies in the eyes of the beholder.

 

I have an open mind about everything. You have a bot that spits dollar bills everytime the market opens, I am willing to try (paper trade of course) I have never make any indicator work in live trading. But that's me, doesn't mean traders outhere are not making money off indicators.

 

Whatever system you use, mechanical, science, art, etc. Please bear in mind that all of them has it's limitations. Learn when your system is telling the truth and when is giving you a wrong signal.

 

In all markets, at all time frames, there will be periods of accumulation and distribution. On whatever your use art/science/astrology/tea leaves etc. would be nice to train your system to spot these periods so you can act accordingly when the market distributes. At least this is how I trade.

 

Systems/strategies...art or science...are just road maps. You still need to drive the car.

 

Very well put. At the end of the day, all that matters is if it makes you money...money in your pocket is not an opinion based situation...it is either a) there or b) not there.

 

Whether or not what you do is an art or science is really just your opinion one way or another.

 

I like Auction Market Theory because it is a powerful integration of both, it uses a theory based on scientific evidence, but you must still use your brain to derive your opinion and decide whether or not to back that opinion up with money.

[mister ed 10]

Some great ideas in this thread - great question to ask if trading is an art or a science. These sorts of "philosophical" questions (as opposed to practical questions- "what value of MA should I use...") can add real value to trading, it forces me to take a step back and think about what I am doing. Of course on many forums such questions quickly degenerate into a war of flames, thankfully not on TL.

 

My $0.02 is that trading is a craft, or a "trade": sure there are elements of science, many elements of art, but combining the two on a day-to-day basis is practising a craft.