The Art of Trading
Trading has often been considered a ‘form of art.’ The ‘art’ of trading is an individualized approach. As thousands and thousands of people look at the markets, virtually all of them see something different. This is a good thing. As individuals, we seek out things that we observe or notice.
Math is a Solution
Why Math? Mathematically, it’s highly unlikely that two people would define a pattern the same way. The more inputs involved, the less likely this is to occur.
If you have not defined a pattern. You cannot prove that it actually exists. It can however, exist in your imagination. The questions are: Do you want to trade something imaginary? Or something real?
I grew tired of listening to analysts claim that “this looks like an XYZ pattern.” I thought that something that actually happened would have to be more useful than something that may never have happened at all.
Traditional Analysis
Many traditional technical analysis techniques are flawed. As most are not at all predictive in nature. But, in fact, many are lagging in their indication. I discovered this after listening to trader’s give their analysis and why they wanted to trade specific stocks. Have you ever considered why a moving average is constantly moving? This is because a moving average is calculated at the Close. Why is a moving average calculated using the ‘Close’ of the time period to which it is applied? This leads to the reason why an analyst cannot tell you where the moving average is, until it’s too late? Because they do not know. The real question: “Is what they thought they saw, actually what was happening?” The answer, not always. I decided that the solution has to be something ‘more scientific’.
After studying many of the most successful published traders, I decided to transform the ‘art of trading’ into a something more of a science. I decided to create a Mathematical Methodology. If I could create a methodology based on ‘Math’, it would empower people. My goal was to create something that would make people “Think differently about trading.”
Components of a ‘More Scientific’ Approach to Trading
The following is a list of components I believe are necessary to develop and create a ‘More Scientific’ approach to trading.
Why Math?
This mathematical methodology has been created to assist a trader, analyst, or researcher. It allows them to define patterns mathematically. Once a pattern has been defined mathematically, one can determine if that pattern has been statistically significant historically. As a result, the trader will be able to trade more efficiently.
Risk Management
Managing risk can be performed in many different ways. I would like to think that the more ways you can identify to control risk, the better off you are. In trading, the first thing that comes to mind in controlling risk is using some money management principles. This is only the tip of the iceberg in the realm of managing risk. Once we establish patterns that give us higher/lower chance of success, we can put the odds in our favor.
Managing Risk via Pattern Recognition
How do YOU manage risk? The first thing I noticed during my time spent studying published traders, who were very successful, most of them traded off of price patterns. When I read books on traditional technical analysis techniques. I wondered if the author actually thought about the analysis they had performed.
Manage Risk via Position Sizing
A can determine how much capital he can afford to risk based on probable outcomes. The mathematical methodology allows a trader to determine probable outcomes. It enables the trader to assess his risk as soon as he enters a trade. Using risk management calculations to determine how much he can afford to risk. Position sizing calculations determine the size of the position based on amount of capital at risk and the stop-loss size.