Saturday, August 1, 2009

Why trading's not like golf

Since I’m not pretentious enough to classify most of my ramblings as “bright ideas,” I’ll label them thought bubbles. Here’s the first.

Trading is often compared to golf (in many cases by those who are both traders and amateur golfers) and the super trader to the likes of Tiger Woods. Although trading is for the most part an individual endeavor, although I suppose one can liken the variability of market conditions to the variability of golf courses under different weather conditions, although both activities require extensive practice and mental conditioning, I nonetheless find the comparison wanting. Let me state for the record that I find golf boring and trading fascinating, so I’m biased. Here goes anyway.

The competitive golfer has a simple goal—to finish in fewer strokes than anyone else in the tournament. Each entrant pursues his goal independently of the rest of the field. It’s similar to taking a test and trying to get the highest grade in the class. The other golfers can’t interfere with his pursuit; golf isn’t croquet where a player gets points for hitting another player’s ball.

By contrast, most traders participate in a double auction system with innumerable interacting buyers and sellers. Every trader, from the one-lotter to someone on the prop desk of a major investment bank, affects every other. It may seem intuitive that big-time traders make more of an impact than the little guy—and probably 99.9% of the time they do, but think back to the analogy of the unstable pile of sand where adding a few more grains may barely matter or may make a huge difference (Mauboussin, 7/13/2009 blog). Even with inside information it’s impossible to know with certainty what the ramifications of the actions of any single trader or group of traders are, but we can say with certainty that in such a dynamic system there are ramifications. Intentionally or not, each trader interferes with the pursuits of other traders.

The golfer who thinks about what his competition is doing before taking his shot will probably psych himself out. On the other hand, the successful trader—whether systematic or discretionary—has to have a sense of what other traders have been doing in the immediate past, predict what they most likely will do in the near future, and estimate what the results of their actions will be. Otherwise, he can’t decide whether to dip his toe into the water, to become more aggressive, to go on the defensive, or simply not to play.

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