The Problems of Trading Strategies
The financial world is full of marketers of trading strategies. However, the vast majority of these strategies are not suitable for investing. They are neither diligently studied, nor do they respond to in-depth knowledge of the market.
We really must bear in mind that not because we have managed to make a couple of good trades we are in a position to think that we are great traders.
Lucky fools do not bear the slightest suspicion that they may be lucky fools. They do not know that they belong to such a category. They will act as if they deserved the money.
Usually, traders get to the market; they study one or two indicators and create a strategy. They will have some luck; however, after a while, they will realize that they are not going to make money in the market continually. In the end, they decide to write books and sell their knowledge as another way to take advantage of the thing.
How to observe a stock market and obtain accurate conclusions from these observations
Let’s say we have a group of traders whose strategies are better than average for us. They will have a good year half the time, a bad year the other half, half of them will have a single profitable year, A quarter of them will have two good years in a row and so on.
The more you look at the fluctuations of the market, the stock market and your portfolio, the less sense your observations make. So be careful not to look at the movements of the stock market up and down in real-time and think that you are learning something.
The stock market is no different from any other field of study in which we observe behaviours from which we must draw conclusions that will always be hypotheses. The study of the stock market is not different from the study of nature. To obtain accurate conclusions, we apply the same method that we apply to try to get to know nature:
- Propose a problem.
- Observe the problem.
- Look for a theory that explains it.
- Make predictions based on that theory.
- Check those predictions by doing experiments or observations.
- If the results agree with the theory, go back to the fourth step, if not, go back to the third.
Why is quantitative trading much more profitable and secure than any trading strategy based on technical analysis?
Quantitative trading allows us to avoid all the noise of small market events. It enables us to study rationally and with a good perspective on what we are going to do and invest according to sensible criteria.
Once we have elaborated our perspectives, quantitative trading allows us to validate through the backtests before applying them. In the end, we know that we are not confusing luck with a job well done.
It doesn’t matter how often something succeeds if failure is too costly to bear. That will create stress for us, and in the end, at its best, we will not get anything, at its worst, we will lose everything.
Quantitative trading: Higher profitability
Quantitative trading allows us to develop strategies that we can weigh with clear and detailed studies that offer us sufficient guarantees and risk control to know that we will not end up broke like 98% of the traders who approach the market. Besides, in the long run, it is much more profitable and safe.
With quantitative trading, you can enter a new stage of trading. If you want to learn more about it, we will analyze it in our following article.