Trading as a Science Blog

[kut2k2]

Quote from electron:

You are confusing mathematical methods with science. You can use mathematics to model things, but models are often a pretty crude description of reality and they are not good enough to provide a deeper understanding of things.

Modern hard core natural sciences are deeper than that as opposed to softies like sociology, psychology, economics.

Science is more than just mathematical modeling.

You're confused. First, I'm not the one who brought up formulas, I just pointed out that mathematical formulas don't have to be exact in order to be useful.

Second, I couldn't care less about price or market modelling. Complete rubbish IMO. My approach to trading is scientific precisely because I have no assumptions about market behavior, I simply pay very close attention to what is happening and respond accordingly.

But the above refers to signal generation. When it comes to position sizing, the smart money is on a reliable and theoretically sound formula, albeit not necessarily exact but close enough.

 

[Scataphagos]

Quote from TraderSystem:

I can see how trading can be viewed as a science. For a system to work consistently there must be some logical reason why it works. We might not be able to apply an exact formula to trades but generally we can quantifiably show that there are correlations in the market.

Correct. Trading resembles counting cards in black jack. Card counters know when the remaining deck is in the player's favor*... that's when bigger bets should be made.

Traders can also know when their play is favored.

*The house often negates the player's advantage by dealing from an 8-deck shoe or shuffling the deck after each hand.

 

[kut2k2]

Quote from Murray Ruggiero:

I don't mean a exact formula, I mean applying good research principles and understanding what really happening. For example let's suppose we are studying a trend following method as described by dual moving average crossover. The fact that a half cycle simple moving average minus a full cycle length one is 180 degree out of phase with the market If we assume we are in cycle mode this is something which need to be discussed if we are not just throwing data at the wall and curve fitting.

This means that for example we can design a filter which measures the time the price is above the full cycle length moving average and use that to design a trend mode filter to tell us when it is safe to trade this strategy.

I am not saying this is a great method, but just discussing concepts and a way of thinking.

Do you plan to revisit the issue of position sizing or is that settled for you? (Optimal-f?)

 

[aknaya1]

Nice Blog. Interesting content and nice graphics.

I believe trading is part-science, part-art form. But the "scientific" portion is the whole reason I got into trading in the first place. One definition of science is identifying general truths or general laws that govern a system or the govern the universe. In this case, system=markets.

I've never believed in pure TA because to me it misses the "scientific" portion of trading--it's not rooted in what causes prices to move. So I decided to study the Wyckoff methodology, and Wyckoff prescribes the following laws to understand price movement.

1--law of supply and demand
2--law of effort and results
3--law of cause and effect

Law 3 basically equals a trading range. You need a range so that accumulation or distribution can take place (ie smart money buying or selling shares incrementally over time). Law 2 essentially refers to volume. Law 1 requires understanding support/resistance/trendlines.

Takes a long time to truly understand these things in the market, and then develop a trading method from that knowledge, but to me this is a scientific approach to trading.

 

[electron]

Quote from kut2k2:

My approach to trading is scientific precisely because I have no assumptions about market behavior, I simply pay very close attention to what is happening and respond accordingly.

You call it "scientific"? Please... Science makes assumptions all the time. Every major physical theory is based on assumptions. They are often called postulates. So is mathematics, its assumptions are called axioms. There is more to science than you seem to realize.

I may revisit this next time I am here, because it's something for a bigger post.

 

[electron]

Quote from davidcohenphd:



It's much easier to slap the label of science on a thing than to prove scientifically that what you are selling is better than a thing without that label.

I agree. People who use words like "science" or "scientific" are often ego-trippers or gimmick artists. Deepak Chopra and his fellow New Age gurus never tire of using quantum mechanics to sell their dubious wares.

I get this spirituality thing, but not when QM is involved.

 

[kut2k2]

Quote from electron:

You call it "scientific"? Please... Science makes assumptions all the time. Every major physical theory is based on assumptions. They are often called postulates. So is mathematics, its assumptions are called axioms. There is more to science than you seem to realize.

I may revisit this next time I am here, because it's something for a bigger post.

Once again, you're confused. I didn't say I made no assumptions at all, I said I made no assumptions ABOUT MARKET BEHAVIOR.

I don't know if your problem is reading comprehension, cognitive ability or a combination thereof but you should seek help for that.

 

[kut2k2]

Quote from kut2k2:

I don't know if your problem is WITH reading comprehension, cognitive ability or a combination thereof but you should seek help for that.

edited for accuracy

 

[Gyles]

So if I understand you correctly, Murray, you’re looking at applying the scientific method to trading and then claiming that if you can successfully do that then trading is a science. I’m still not sure I follow 100% but I’ll keep watching the blog. As you know, I love your software but I’m still not sure how the backtesting I do is really “scientific” per se.

 

[TraderSystem]

I like the card counting analogy earlier. I think it applies to what I was saying before. If done well card counting can be shown to give the player a slight edge. That’s not to say that they won’t lose money on any given night (just like a casino will lose money to some players) but that in general they will make money in the long run.

In essence with trading it’s the same. We’re designing systems that let us see when trades are statistically in our favor. We still might lose a lot of trades but in the long run we’ll come out ahead. So in that respect is it not a science? We can study it, observe it, calculate it, and test hypotheses so why not a science?