Facts and Figures: A Gold Mine For Some
Some people like facts and figures; others prefer trusting their intuition and looking for artistic expression in the trading realm. The trading profession is big enough for all kinds of traders, though. There isn't one right way to trade, but the trick is to figure out what you are like and to match your trading style to your personality. Take the data-driven trader, for example. At an extreme, the data driven trader looks for consistency and attempts to find "rules" and conventional wisdom to guide trading decisions. For some data-driven traders, a major preoccupation is to study historical data and backtest ideas until a good fit is discovered. Other data-driven traders enjoy spending their nights scouring reports for a valuable tidbit of information that will give them an edge. If you are the kind of trader that enjoys getting caught up in the
details, using this affinity to your advantage is the best way to profit from the markets.
Consider Aaron. He trades his own hedge fund, and takes a methodical approach to trading. He loves facts and figures, and he is good at using them to make profits. He has had a lifelong interest in mathematics and science that has influenced his trading style. "I backtest everything," he says. "Much of my day is spent backtesting strategies and indicators, and most of them don't pan out. But once in a while I hit a gold nugget, and that's a good day. I think that's the most important thing: backtesting and understanding statistics so I can decide whether historical performance is a fluke or if there's some actual, profitable signal there." How does he feel when his backtesting works? "It's always a surprising and joyous moment when I find an indicator that works and lives up to statistical backtesting."
Are there any drawbacks to his approach? Aaron says, "I think I'm very linear. I can't do multi-tasking very well. I have to do one thing after another. I think that's my weakness. My strength is being very methodical and quantitative." "Sometimes it's difficult to pull the trigger," he admits. "Maybe it's getting close to my stop loss level and I think to myself, it's got to turn around. So I cancel my stop loss order to stay in the trade. Well, it might turn around and go back up, but it might just keep going down, and I'm going to wish I had gotten out and followed the strategy."
Aaron is a successful trader, but not all data-driven traders use their love of facts and figures to their advantage. Dr. Richard Geist, in his book "Investor Therapy," profiled the typical data-driven trader. Although a detail oriented trader may identify information in reports or in data records that more impressionistic traders may miss, he or she often can't separate the forest from the trees. It's hard to see the big picture when you are focused on details. It's important not to get too caught up in a small fact and forget about broader issues. For example, a company may be gearing up to manufacture a cutting edge product, but if few consumers have the money to buy it, or if there is little interest in using the product, sales will be in a slump. Discovering a "hidden" piece of information in an annual report may be a grand discovery, but depending on broader market factors, it may have relatively little impact on the market action.
Some traders are data-driven and use this style of trading to their advantage, like Aaron. Other traders, however, get too caught up in details, and need to modify their approach. There isn't one right way to trade, but it's essential that you match your trading style to your personal strengths. If you are a data driven trader, you may prefer studying facts and figures and trading for the long term. Whatever you decide to do, though, don't be afraid to be yourself. If you like facts and figures, use it to your advantage. You'll profit from it in the long run.
