Is trading an art or a science?

As with any good question, the answer is not a straight yes or no; it depends. Some very gifted traders are definitely artists. They might read voraciously, devouring financial news, macroeconomic data and company reports, and then sit deep in thought for weeks on end before opening their laptops to trade. Or they might just stare at a price chart for a few hours, and then decide to purchase a particular stock. Which subsequently – surprisingly often – goes up. And they can’t really explain why they bought that specific stock at that exact moment; they just knew it would go up. Seeing them trade is just like watching a naturally gifted artist paint. Their trading is discretionary in nature.

Other traders are more like scientists. They may even have a PhD in physics, or another highly mathematical discipline. Some are literally former rocket scientists. They use their scientific knowledge to build computer systems that consume gigabytes of quantified financial data, pushing it through carefully tested and calibrated strategies running on powerful computers, which then decide when to buy and sell.1 The whole trading process is fully automatic. There is no artistry on display here – just banks of blinking lights on computer servers. Scientific trading is purely systematic, with no room for human judgement.

There are good and bad artistic traders, but there are also successful and unsuccessful scientific ones. And among the very best traders in the world, you will find both discretionary artists and systematic scientists. What, then, distinguishes good traders – of either variety – from bad ones? Simply put, good traders all follow certain rules.

What might surprise you is that the key rules are virtually the same for all outstanding traders, regardless of their preference for intuition or algorithms. These rules are scientific – they are underpinned by the mathematics and financial theory which systematic traders are well versed in. But profitable artistic traders also follow the same rules. They won’t always be conscious of this, but if you examine their trading history carefully you can see the rules being followed. Discretionary traders may be unfamiliar with the fancy theory, but they still know the rules instinctively, having developed them through their own trading, or from being educated by more experienced traders.

In contrast, bad traders do not follow these rules. They use a curious mixture of gut feeling and half-baked pseudo-scientific methods which are at best unhelpful and at worst downright dangerous. Most of them will lose money, unless they are especially lucky. These lucky few will assume their success is down to ignoring the rules. They are wrong.

This book is about combining art and science. Part of a successful trading strategy can be purely artistic – down to your intuition. It could also be entirely scientific. But however you trade, you must always follow certain key, scientifically grounded rules.

I have learned and used these rules in my own trading career over nearly 30 years: initially as a clueless retail trader, then as a discretionary trader for an investment bank, and subsequently as a systematic portfolio manager for a multi-billion-dollar hedge fund. More recently, I have been managing my own capital again, where I predominantly employ systematic strategies with occasional forays into discretionary trading, marked by a touch of artistic flair.

If you do follow these rules, you will have a better chance of succeeding as a trader. Around 85% of retail (non-professional) traders lose money, so the odds are stacked against you. Following these rules will give you a fighting chance of being profitable. Whether you make a decent return will then depend on your own trading skills, and whether you are lucky.