Every sunken ship’s got a room full of charts
I came across this gem of a quote in a comment on the big picture and it reminded me, somewhat circuitously, of another one of the things I view as axiomatic about algorithmic trading.
In The Alchemy of Finance, George Soros observed that one of his advantages as a trader was that while he held beliefs strongly, he was also capable of abandoning or even reversing them quickly as conditions evolved. An algorithmic trader needs something like this but more so – an automated trader is best served free of opinions entirely.
I think this is why the sunken ship quote made me think of this. While charts are an effective means of quickly communicating potentially a great deal of information to a human viewer, the cult of chart technicians and the endless supply of books, lecture series and training materials they actually make their money on might convince you that you can form your opinions based on chart patterns…
And so you can! Whether this is a good way to trade is another matter entirely. For the “mouse trader,” I suppose it might be, and I certainly won’t argue it one way or the other.
But for an algorithmic trader, the only kind of opinion that matters isn’t about a particular chart formation or even fundamental factors driving a particular market. The only opinion that matters for an algo trader is the firm conviction in the deployed algorithm and the methodology employed to develop it.
A few years ago a study (discussed here, actual study here) revealed that brain damage which limited emotive function seemed to correlate positively with investment performance. From the article:
“Antoine Bechara, an associate Professor of Neurology at Iowa, suggested that successful investors in the stock market might plausibly be called ‘functional psychopaths’.”
Charming, right?
We have an out: we don’t have to be the “functional psychopaths,” we just have to write them and then have the self-control to let them do their thing. One of the big benefits of algorithmic trading is that fear and greed are taken right out of the equation. Unless, of course, the person operating the algos loses her mettle mid-stream and shuts things off precipitously or starts ill-advisedly twisting at the knobs on the side of the box…
The only opinion relevant for us is the one that fortifies our belief in the system in the face of whatever the markets happen to throw at it.
I might have a view about, say, crude based on some sort of fundamental or geopolitical perspective, but it will affect my trading precisely as much as my opinions about Eli vs. Payton Manning – not at all!
