Trading Books Can't Teach You Trading

Trying to learn trading from books is like trying to learn surgery, basketball, or how to fly a plane from a book—it definitely helps, but it has severe limitations. The reason for this is that the kind of intelligence needed to do these things successfully is dynamic and active. It depends on conditions on the ground that day. By all means read, and read hard so you know what you ought to do and not do, but on the ground, in real life, applying the knowledge is extremely difficult.

I classify curiosity into two depending on where your efforts are directed. Sherlockian curiosity is where you are curious about how things are in the ground. You look for evidence, speculate and form theories. By its nature, Sherlockian curiosity has the odds stacked against you. You are seldom right and often wrong. But, when you are right, you make a real difference. This is the kind of curiosity everyone must have. It is not a matter of academics or anything of that sort, but raw wits. A sharp brain that goes up against life itself and wants to make the absolute best of things.

But sometimes, patterns are observed, and they pose a question as to the nature of something or its behaviour. This yields academic curiosity. Academic curiosity is not about anything real in life, but about simply explaining and theorizing—it’s about the abstract. It is a special kind of curiosity. A form of fiction in some sense, but one that can be tested on whether it holds water in the real world. Academic curiosity is important. It led to things like electricity and medicine. It is also an important tenet of Sherlockian curiosity. As you speculate, you apply academic theories established by academic curiosity. They are both forms of curiosity but with different stakes. Sherlockian curiosity often has higher stakes because of its immediate concerns, while academic curiosity has lower stakes. But, academic curiosity has higher payoffs in the long run and tends to be more correct than wrong because of how it is built up on previous work rather than speculation.

Reading trading books is applying academic curiosity to a Sherlockian field. It is not a useless exercise, but it doesn’t make you a trader. Trading and only trading makes you a trader. Certain careers are inaccessible precisely because of this. You have to do them, and do them with the risk of failing and failing badly, to ensure that you have a real chance at actually succeeding. Trading and basketball fall under this category, but none more than surgery. Surgeons in training have real risk of killing people. This is often mitigated by having professionals watch over the learners but it is not fail-safe. This is why top surgeons tend to be psychopaths—they don’t care about the deaths in your pursuit of excellence, and they are unshaken by the prospect of killing a patient. It is ice-cold and ugly, but a necessary part of society.

Traders who will end up great are a bit like this too. They need to be unshaken by the prospects of losses and to move on quickly if the losses happen. No matter what happens, their yesterday can’t affect their present moment. (More on that in this post)

And as a quant, you have to be careful about applying academic curiosity to a Sherlockian field. I’m currently reading an excellent book about this (download it here). The author talks about how the use of models, often based on unrealistic assumptions, has led to various problems and even crises in the markets. He specifically criticizes Value-at-Risk (VaR, which is hard to optimize mathematically btw because you will keep getting local minima), BSM, and the Gaussian copula (the main mathematical culprit of the global financial crisis, whose main problems are lack of asymmetry and failure to account for tail dependence). I’ve criticized VaR and the Gaussian copula in my posts as well.

It is a call for pragmatism in quantitative finance—something I am keen to follow on my blog. My view of quants vs investors is similar to the dynamic between F1 drivers and their engineers. We are the (financial) engineers; we make the (investment) vehicles; and they are the drivers. This is why I err towards research that can give investors an edge in the markets. Sure a quant can wear both hats, but you have to know which one you are wearing at any given moment.

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We all do things for one reason or another. We start with an end in mind, and do our best to move towards that end. Despite our best efforts, most journeys are fraught with all sorts of hazards, detours, hidden dangers, surprising turns, new mini-adventures, and more—and that is if we do not get derailed by other things, or discouraged mid-way. We envy the ‘sociopaths’ among us who have laser-like focus and ambition. They say they will do X; and do it.

But, this view of goals, success and achievement in life is wrong, unnatural, and bound to lead to unhappiness. Life is not, and should never be, about conclusions. It must never be about the bottom line. Because the ending to life may be as cut short, tragic, and as anti-climatic as the ending of Game of Thrones. It may come suddenly, out of nowhere, and be brutal. Endings are rarely what we imagine them to be, and even if we did imagine them, they rarely feel as we thought they would.

Instead, we must direct our focus on the journeys. The steps in our path. We must stop and smell the roses. We must hope, for hope is what drives us, but we must never be disappointed when our hopes are dashed. And they will, a lot. We must take the blows with and sing about them, because life, the old bitch, has done it once more. We must anticipate the endings of things always, but our goal should never be to model the end but to pursue the journey. To go where the road takes us. We must savor the scorching heat of the sun, as we are on our last drop of water. We must fight with dignity, and honour, and bravery, all our enemies. We must shirk diseases, and hunger, and pain. We must go for the girl, with bravado and eagerness to win her heart. We must cherish those who torture us even as we plot their demise. We must wonder at all sorts of things along the way. We must never allow ourselves to be down. We must count our luck always, and be happy at our good fortune when it comes. We must live a life worth telling. That is all we ever have.