About the Author: Ken Long is a retired Lieutenant Colonel in the U.S. Army with a Master’s Degree in Systems Management. He is a doctoral candidate researching the management of uncertainty and an active trader. Ken is the founder of Tortoise Capital Management, www.tortoisecapital.com, where he conducts market research. He is a proud father of 3, a husband, teacher, student and martial artist. The above article was reprinted from Ken’s blog.
In any profession that features a strong human performance factor, there will surely be a mix of both art and science that contributes to the final product and performance level. Since the trading profession incorporates such a large amount of human psychology at both the individual and organizational level, it’s worth considering how both art and science are reflected in your own trading practice. It’s also good to know how strong you are in both dimensions so that you can ensure that you leverage your strengths while protecting your weaker areas.
The scientific aspect of trading has a lot to do with quantifiable considerations:
Statistical analysis of market conditions.
Statistical analysis of trading results.
Statistical analysis of various trading systems to rank them by effectiveness and risk adjusted return.
The predictive power of back testing and forecasting algorithms.
Analysis of repeatable events to find efficiencies and economies of scale (e.g., in hardware and communications throughput factors).
At the institutional level, the relationship between supply and demand in determining price.
The ability to forecast market responses based on the law of large numbers and mass psychology.
Identifying causation and correlation between variables.
Identifying cause-and-effect relationships.
Creating and testing trading hypotheses.
The artistic aspect of trading has to do with qualitative judgments:
Self-knowledge in terms of skills, attributes, and trades.
Psychological and cognitive biases that interfere with trading proficiency.
Interpretation of news events for scenario-based trading.
Hedging positions against forecasted risk scenarios.
The area in between the black and white of trading rule sets where the trader’s interpretation and judgment rules.
Identifying trading strategies, market’s targets that harmonize with your preconceived notions of how the market works and where your edge exists.
The application of the insights from psychology and sociology into human performance.
Tolerance of uncertainty, ambiguity, and risk.
Articulation and operationalization of goals and objectives into quantifiable measures.
Qualitative descriptions of successful outcomes of your trading practice.
These two lists just scratched the surface of the art and science of trading. You should be able to see how both of these domains are powerful influences on the final outcome of our trading practice. Finding the proper blend of these two domains will be crucial to your success as a trader.