THE ART, THE SCIENCE, AND TRADING
During the landing of the lunar module, Commander Neil Armstrong and Pilot Buzz Aldrin successfully piloted the 32,000 pound LM for two hours before landing on the surface of the moon. At the last minute, Armstrong realised the computer’s auto-landing programme was set to drop them in the middle of a crater.
With critical reserves and under immense pressure, Armstrong took over manual control and maneuvered the spacecraft so that it would clear the crater and land safely just beyond where the established landing zone was set to be. Scientifically designed instruments got them to the moon, and the art of human element safely executed the landing.
Science lives in the numbers. Art lives in how you interpret them.
This concept translates to trading too.
The Scientific Trader
The trader who works with science is known for discipline, for devising a trading plan, following the rules, and sticking to the strategy. The scientific trader seeks cold facts over abstract theories and believes in the data and the numbers.
The Artistic Trader
The artist in the trade creates their own reality by interpreting the numbers. The market is based on sentiment and trading is an emotional response to the data.
Artistic trading is in the abstract theory where facts can be fluid and intuition plays a role in action.
Many traders believe you need to choose art or science to be a successful trader. That you need to choose two of the possible options in the ‘triangle’:
But can all three exist cohesively together?
Can trading success exist with both the science of working with the dynamic market and the art of adapting to what you can’t control?
The Dichotomy of Trading
At The Trading Forest, we believe that the successful trader has a combination of both. There is an art to creating science, and a science to creating art: The two don’t oppose one another, but function together as different aspects of a whole.
Pure trading is an art that works to become as close to science as possible. It recognises that there is a need for emotion in finance and this brings intuition and abstract theory.
If trading was simply a science, programmed and automated software would take over and there would be no need for traders. The artistic approach gives traders an edge in their trading and allows them to adapt and evolve with the market,
The notion of dichotomous trading and artistic science can be a simple equation:
Art + Science = Greater Results
In trading, we have the facts of prices and company fundamentals {the cold facts of science} and the way we interpret those {the artistic element} is what leads to a different result. The numbers in the market will always be the same for different traders, but the interpretation and the artistic response to those numbers is what sets the result apart.
The best traders have a particular talent of blending precision with passion.
Ultimately, success is not about getting the Lunar Module to the moon. It’s about landing it.
In the same way, success is not about what is happening in the markets. It’s about how you choose to work with the market and how comfortable you are with your choices.
The Art and Science of Trading
There is an art to science, and a science to art: the two are not enemies, but different aspects of the whole
Equity investing has not escaped the debate of ‘art versus science’. However, we would be barking up the wrong tree by trying to classify it as either one or the other. It is both.
On the one hand there are the hard objective facts of prices and company fundamentals (the ‘science’); on the other hand, are the ways that these are interpreted (the ‘art’). If trading were pure science, the end result would always be predictable; if it were pure art, it would be ceaselessly random and chaotic. In fact, trading is neither of these—and that is precisely where the fun and the intrigue lie.
“Gathering relevant market information is a science. Filtering out irrelevant market information is an art;
Measuring what worked in the past is a science. Understanding why things are different now is an art.”
The best investors have a particular gift for mixing passion with precision.
Trading, Evolution and Learning to Lose
An onion plant is old in nine weeks, to create the olive, king of all trees, a hundred years is required
Reduced to its core, trading the market is all about understanding a set of “observable facts”. These facts are bracketed by what you, the trader, deem to be important (i.e., technical, fundamental, sentimental, news-worth and macro information). Understanding how to read these facts, whether they are expressed as numbers, graphs or headlines is at the heart of what will determine your success.
As OG Mandino once noted (see The Great Salesman, 1968), “time teaches all things to he who lives forever, yet we don’t have that luxury”. And yet despite our finite little lives on this earth, the art of patience must be practised. This paradox is as true in the world of trading as it is in the world of human consciousness. Only good habits and robust principles will endure.
In the realm of trading, one might express the idea like this: ‘regardless of the financial imperative to take action, any decision must not be taken by impulse alone, but by a series of good habits brought together’.
So, what are good habits and robust principles? Or put differently, why are certain people good at trading and others not? And most importantly, how can you become one of the good ones?
In order to become a good trader, one must learn very quickly how to filter out the noise and focus solely on the relevant variables. Before considering any trade at all, a serious trader will always ask themselves “why”. Either,
- Why must I buy this instrument? or
- Why must I sell this instrument?
Fundamentally, there are only two types of trade: a profitable one and a losing one. However, concealed within this simple dichotomy is a big lie: you can make money on a bad trade and you can lose money on a good one.
It’s not as confusing as it sounds. A good trade is one based on following sound principles, sticking to a philosophy and keeping the big picture in mind. A bad trade is one that follows no principles, is based on impulse and led by luck and emotion. Of course, once in a while a bad trade may also be a profitable trade and a good trade may lose money. Occasionally, the best team loses and the worst team wins. Such is life. Over the long-term though, good trading will yield better and more consistent returns than bad trading.
This is why, especially for new traders, it helps to focus on one’s growth and evolution as a trader rather than early rewards or losses. It goes without saying that individual traders cannot control the outcome of the market. However, everybody can control how well they learn to play the game—and if you learn to play it well by placing good trades, you keep stacking the odds in your favour. Over the long-term, the ‘good trader’ will always outperform the ‘bad trader’.
There is no right or wrong way to approach trading, but you greatly increase the chances of losing money if a proper process is not followed.
Therefore, it is important for any trader to understand the following:
- What is driving the instrument?
- Where is my risk?
- When is the right time to buy or sell?
- Have I taken all the factors into consideration?
- Am I being greedy?
- Have I considered all my risk parameters?
- What random elements have I failed to consider?
You cannot develop your feel for the markets by reading books or studying alone. You need to be in the game and understand the market behaviour. You need to listen to the market and learn from it, rather than impose your views on it. Remember, you always follow the market; the market does not follow you.
There is no single path to becoming a successful trader, but any route to success must be aligned with good core principles, systems and patience. And of course, as with any habit, consistency is key.