Episode 270: Do You Need Math Skills to Pay the Trading Bills?

by robbooker on July 9, 2014

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Your host Rob Booker calls in to The Traders Podcast from Portland, Oregon. In this show, Rob talks about Jim Simons, a retired hedge fund titan who used mathematical strategies to become a billionaire. And this leads Rob to wonder: Does a trader need to be good at math in order to be successful? Let us know what you think. Thanks for listening.

Links from this episode:

New York Times article on Jim Simons

A Dozen Things I’ve Learned From Jim Simons

Read Rob’s blog articles

Rob Booker.com

RobBooker.com/mail

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Rob on Twitter: @RobBooker

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{ 8 comments… read them below or add one }

BrianF July 10, 2014 at 4:20 pm

Haven’t read the NY Times article yet, but here’s my initial reaction about Math and retail trading:

There was a time when a warrior had to know the hilt from the pointy end of a sword, and a computer programmer had to know math because everything was written in assembly language rather than our modern object-oriented computer languages. Those days are gone, and so are the days of pit trading when math skills were critical to spur of the moment decision making. This is retail trading, if I can’t reliably do the math in my head, I can use a calculator or a spreadsheet.

That being said, Math is the undoing of most traders. Why? Two reasons. First, they don’t understand probability and the incredible power of compounding, how very small amounts of money can build or destroy an account. Second, because they don’t understand the difference between one trade and 1000 trades. Therefore, they spend all their time trying to predict the future. In one trade, you are either on the right side of the trade or you are not and don’t make any money. In 1000 trades, there’s lots of ways to make money. Picture a set of old fashioned scales. Flip a coin 1000 times, you are likely to end up with 500 losers on the left scale and 500 winners on the right scale. Traders set themselves up to fail when they focus exclusively on moving the right scale down through a better offense. However, the higher the number of trades, the more influencing the losers, moving the left scale up through a better defense, changes the balance of the whole series in favor of the winners. Given enough trades, defense IS offense.

Another thing to consider is diminishing returns. You can spend thousands of hours trying to wrest another 1% of probability out of your offense, or simply look for a way to cut your losses by 1%. It doesn’t matter how, maybe a visit with the tax man, renegotiating commissions, or just a routine to double check your entries before pushing send.

Finally, market conditions change. A good defense will follow you to your next system. An offense that no longer works, one which you spent thousands of hours on, is still rubbish. Why lavish your mistress with your time, your treasures and your heart? Dump her and move onto the next system. Thousands of traders win at this game with completely different offensive strategies, where they correlate is in their defense. Take the hint and stop trying to predict the future.

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BrianF July 10, 2014 at 5:46 pm

That was a long winded way of saying you don’t need much beyond basic math skills and a very deep seated appreciation for probability and statistics, because if you don’t understand those speed limits, you have the life expectancy of teenager navigating his new Ferrari down a Monte Carlo mountainside.

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Tom July 11, 2014 at 10:47 am

Thank you for both telling me about Jim Simons, who I’ve never heard of, and for also touching on a subject that is dear to me. A confirmation of my beliefs, of sorts.
-Cheers guys

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Brian F. July 11, 2014 at 1:03 pm

Dear Rob and Jason,
As you requested of your listeners, I read the article, A Dozen Things I’ve Learned from Jim Simons. I wasn’t really wowed by it until you made the comment, “I think it’s important to listen to somebody that’s made 25 billion dollars trading the market.” The majority of traders would agree with your statement, but then again, the majority of traders lose. Putting people on pedestals is one of the reasons we lose. Don’t get me wrong, I’ll listen to anybody because even a non-trader may give me one more piece of the puzzle, but people like big hedge fund managers and Warren Buffet really don’t have that much credibility in my book. I’m a small retail trader, Warren is not. Traders love to put money managers, talking heads, gamblers, and people in completely different occupations on pedestals. For example, traders look up to former pit traders, but most of them couldn’t make the transition to electronic trading, so why the heck would I look up to them? Even big hedge fund managers are not performing the same job as I am. Most of them just run with the pack, trading the same issues like Apple and dancing while the music plays, because you don’t lose your job if you all run off the cliff together. What do they know that’s going to help me? Give me a trader who has been a retail trader for years, one who’s made every mistake, learned humility, process, and the value of doing things right. That’s the person to put on a pedestal. That’s the icon to teach you trading, not someone gambling other people’s money, or a bloviating Russian with the title of “Dr”. before his name that has written 80 books in 40 years and never trades. Give me a survivor and I’ll show you someone who can teach you the business, somebody like, well, like Rob. Losers lose because they crave what makes them lose, Jim Rodgers prattling on about China, rather than guys like Rob telling you to stay out of trouble and stick to your process. Talking heads have status among the losers, Rob has status where it counts, those who know the difference between the trading business and the business of separating you from your money.
Ok, enough with the man hugs. What did I get from the article? Warren Buffet once said, it’s the first million that’s the most fun. Presumably, this is because that first million is small enough to move around, to go where you want and get out where and when you want, not just where or when you can. Referring back to our Dozen Things article, I noted the comments regarding volatility and liquidity. They want volatility, but they need the market to be liquid. There’s a lesson to be learned here for retail traders. Trading books that don’t understand trading tell you to only trade liquid markets. Where’s the opportunity in that? Illiquidity on the losing side is what makes price move, so illiquidity is precisely where we will find the greatest opportunities. How do you deal with such conditions? By sizing down and attacking those opportunities. Sizing down gives you a greater ability to make due with the liquidity you have, eliminates the need for stops, thereby erasing the danger of being swept out, and gives you access to the enhanced profits available under such conditions. Big traders like Warren Buffet or Jim Simons can’t go where you can go and do what you can do. They are too big. Listening to them makes no sense. A Little League baseball player shouldn’t seek advice from a pro football player, their level of competition is different, their job is different, and their mindset is different. The losers don’t get this, so they put Jim Craemer on a pedestal and tell Rob Booker, “Where’s your billion dollars?” If I was to put someone on a pedestal, it’d be someone like Ryan. Ryan developed his own system, so it’s not correlated to how the losers trade. He’s slowly compounded his account to a level sufficienct to go pro, and he’s going for it. To me, that’s a role model.

Bottom line, if you want to become a pro plumber, seek advice from a plumber who’s been around the business for some time, not the guy who owns a sewage treatment plant.

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FxCave July 11, 2014 at 1:42 pm

Ummm… I am going to put Brian F up on a pedestal. Just kidding, except I agree with what he’s saying. I’d rather hear what Rob’s friend Shon Campbell (who doesn’t know any other traders) has to say than Warren Buffett the ultimate insider trader. I’ve always said that when Warren Buffett or George Soros say they are going to buy it’s because they have a bunch of §h¡±é to sell. Conversely, when Soros says he’s out of all his gold positions it means he is looking to buy. And also isn’t it funny how there are so many people out saying they are turtle traders except they’re all selling turtle systems. So how is it that they raise turtles in Singapore? I have an idea and it involves a big pool and a bunch of BS.

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fxoutlier July 13, 2014 at 5:26 pm

When are you boys going to interview Brian F, or have you done so already?

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Brian F. July 18, 2014 at 9:02 pm

A. Why interview a blabbermouth git like me? You know I’m a-gonna say it anyway LOL.

B. People like Rob are literally one-in-a-million. I know of only one, maybe two other people like Rob in the business, people who get it and are willing to spend the time to help you get it. I’m not really sure he’s just a trader. In fact, I don’t know what to make of him. He’s an artist, proud father, poet, and prolific writer. Rob’s a veritable renaissance man (Jason too). I respect their opinions BECAUSE they are not afraid of using that wide base of knowledge and mulling over crazy notions to get at the truth (Ex. Rob’s never ending analogies about trading). That’s an essential skill to trade, considering the unthinkable and rejecting what doesn’t work. Why is it that someone that is accomplished in so many areas also understands trading, the single most difficult endeavor to master in human history? You’d think it would require a specialist. It doesn’t. Specialists get creamed because they become experts at what doesn’t work. Trading isn’t about knowing everything there is about trading. In fact, most of what is taught about trading equates to making you a more skilled player of Three Card Monte. But, Three Card Monte is a scam, any skill you develop just makes you more susceptible to losses. Most people lose because they spend all their time becoming experts at what doesn’t work.

C. I don’t have all the answers, but I suffered enough to get most of the important ones. That knowledge convinces me that Rob knows a lot more than most people who worship at the feet of market icons would ever suspect. One of my favorite personal sayings is “LOSERS CRAVE WHAT MAKES THEM LOSE.” Therefore, they will pay millions to bloviating Russians with a “DR.” title and multiple best sellers, books that sold millions of copies TO PEOPLE WHO LOSE, and completely ignore traders like Rob who are trying to dispel your preconceptions and teach you how to trade. I’m not in the business. I’m also not as nice as Rob and Jason. I know I write too much, but you might be surprised that I hold back a lot of what I know, the proprietary stuff I dreamed up myself, because it took me a better part of decade to learn it. I know that sounds horrible, but it takes a special person to do what he does. Maybe someday I will be that person, but I’ve got a lot of personal goals to reach first.

Good luck,
Brian

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Brian F. July 19, 2014 at 7:49 pm

That didn’t read well. In fact, it reads like a pompous ass wrote it. Let me take another stab at it. Rob and Jason spend a lot more time trying to help others than I could ever muster at this point in my life, but they are just that kind of people. In my opinion, many aspects of trading should be withheld from the student until they “get it” due to the fact that most people lose because they never get what’s most important (Basically anything that comes out of Brad’s mouth).

Rob talks about what’s important, but he also discusses all the things that will help. There’s the problem. His phrase, “Make yourself a better person and make yourself a better trader” is completely true, but it drives me friggin crazy. First you have to get it. Not understanding what works and making yourself a better person is just going to make you a happier, more well adjusted loser. If we eliminated all the drinkers, drug users, womanizers, sleepless workaholics and playaholics from the winner’s circle, it would be a pretty small club. So I guess the bottom line for me is understanding the commonalities of the winners, and then folding in the things that will improve a technique with a prayer of survival.

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