Tuesday, July 08, 2014

Aligning the Head and Heart in Trading

In coming posts I'll be exploring the use of data and quantitative tools to aid the discretionary decision making of traders.  

Like anything powerful, quant methods can be used to great advantage or misused in destructive ways.

The goal is not to supplant individual decision making, but to inform it.

Just as aircraft pilots, physicians, and engineers rely upon data-driven methods to aid decision-making, traders can use well-constructed tools to identify valid trading opportunities.

Those same tools can lead traders to become fixed in their views, however, and fall prey to confirmation biases.  Tools are only useful if employed for the right tasks in the right ways.  

When discretionary decisions are grounded in proper research, the benefits are psychological as well as financial.  It's easier to have real conviction in an idea if you've studied it, run the numbers, and seen how signals behave "out of sample" and in real time.  It's like buying a car once you've conducted a compression check of the engine and taken it for a spin.

Surely our trade ideas deserve as much due diligence as our automotive purchases!  Selecting a car has strong intuitive components of pattern recognition:  we sense what we like in a vehicle and know when it feels right.  That doesn't stop us, however, from reading reviews of the car, checking its reliability, and running those road tests.  The best decisions occur when head and heart are aligned.

In upcoming posts, we'll look at ways in which that can happen. 

Further Reading:  The Greatest Challenge in Trading