Trading on Monday

Lonya arrives
Lonya has been here for a couple of days now. The top picture is him in the train that goes from Schipol Airport (I picked him up because I am good guy). The picture below is meant to indicate how comfortable Amsterdam is for us. If he didn't have a life back home, he would stay here for quite a while longer. He likes the free feeling of Amsterdam as much as I do.

Art vs. Science
Many people, with all too much pride, explain that what they do is an art and not a science. This type of thinking assumes that science is something that is simple because it has rules and art is difficult because it requires the creativity. This implies that Newton engaged in art since his science was not yet science and implies that middle schoolers in art class who are taught to work with certain materials are actually performing science (because they are following the teachers rules). How boring science is!

I categorically disagree with this definition of science. Science is the way that people discover new things and check them so they can rely on their observations. Science is the way that people systematically add elements together to create something totally new. Science is the way that a choreographer reuses elements that elicit reactions from the audience or reuses elements to put dancers into a certain position from which they can express something better. There is no reason to assume that science covers only linear or expected outcomes. Combinations of elements in chemistry create compounds with entirely different properties.

Chemistry, art or science? Every pursuit is both art and science.

Finance: Art or Science?
I won't surprise you by saying that I believe finance, like pretty much everything else, is both art and science. First, you learn the rules (as could be established as scientifically as possible). Then you practice playing by the rules and learn what is not truly set in stone. Most things are not set in stone: volatility does not have to fall when the underlying price rises; stocks do not have to act log normally (more about this below); correlations are not a rule; a spread trade is a risky bet, not a sure thing.

And if you are a great artist, you develop something that people will use later. You will develop science. The better you think the more you'll be able to contribute to making what you do a "science." (this topic is covered quite exhaustively in Sparks of Genius)

How to discuss art. (slash why talking in outputs is terrible)
When discussing a financial topic with someone, keep in mind whether the particular topic you are talking about is a topic that is an established rule or something that just has arguments for and against. (A model does not have everything built in and does not work all the time). Unlike in engineering (or physics), you cannot just say some numeric or boolean answer and be satisfied. A true conversation about something that can act randomly requires balancing pros and cons, and re-balancing all the time. (Yes and no is very useful in operational mode, when you want someone to understand exactly what you want him or her to do.)

Since, the assumptions in finance are ever changing and the behavior of markets are under constant flux, you should strive to understand something as fully as possible. That means you should examine all the arguments that push something one way or the other. For example, if I ask what will happen to the underlying price when the volatility increases, and you answer the price drops, then you have missed the point. You must say why you think the price will drop.

In the same way, if you ask whether someone is democrat or republican, you do not yet know anything about them. You know whether they agree with what you currently are willing to believe but since you do not know why they made that choice you know too little to make any sort or judgment.

In that way, finance is a lot like marketing or psychology. Empirical studies are important but will not give you rules to follow. Instead, asking why is important.


Preschool Graduation
It has been 3 weeks since the program began. Most of the trainees are relatively fluent with the Option Volatility and Pricing book and many other topics like currency risk. We have spent a couple of days watching the previous two classes of trainees trade. The batch in front of ours is very talented and got promoted to the real trading floors. Though the graduated trainees (not my batch) are all pleased with which desk they will be sitting, they had no part in determining at which desk they will be working.

My batch gets to trade tomorrow, which means that it is now time to read all the books on how to control your emotions while trading. (Thank you poker for teaching me to deal with chance, especially bad beats.) Learning the theory well beforehand allows one the time to read about subjects that not all programs think are mandatory like 'how to get into the zone or emotion free trading.' Some of these subjects that interest me, but don't necessarily has established answers, are below.