Adrian Reid explains how to trade like a scientist: design a hypothesis about what works, code it into rules, and test it against 15 years of historical data using tools like Amibroker. Back-testing beats gut-feel chart reading.
Hi, it's Adrian here. And look, someone challenged me today on one of my Facebook posts about my claim that trading is scientific. They were saying that trading is a skill and is absolutely not scientific at all. So I recorded this quick video just to share my perspective about why I believe trading can be scientific and how you can use scientific principles to improve your trading. Hope you enjoy.
Look, I think it's a perfectly valid argument. It depends a lot on the way you trade. I thought I'd record this quick video just to share how I believe that you can bring the scientific approach into trading. You see, all of my trading is purely systematic. That means it's rules based. And those rules are being tested before they're being used. So what I do is I'm creating systems or sets of rules that tell me when to buy and when to sell. And I'm back testing those over 10, 20, 30 years of stock market history to make sure that they work. Now, the scientific aspect to this is much like an experiment that we would have done in chemistry or physics in high school where you have a hypothesis and you design an experiment to prove or disprove it. Now how does that come into trading systems? Well, what I'm doing is saying let's say we've got a simple moving average crossover system. So we buy when a short term moving average crosses above a long term moving average. And, and we sell when the short term moving average crosses below the long term moving average. Now, in of itself, that is not a good trading system and I absolutely don't recommend it. But let's just say that we were starting with that as a premise and we had a hypothesis that if the broader stock market, let's say the stock market index was going up, that the signals from the moving average crossover system on individual stocks were better quality signals. So what would we do? We design a test, a backtest to validate or to prove or disprove that hypothesis. So we put in a rule that says if the index is above the moving average, then use the crossover system. Otherwise, don't we code those into a software platform such as amibroker? My clients and myself all use amibroker and then run a back test. And you could test that over 10, 20, 30 years of stock market history in all different markets around the world and validate whether or not that actually improves your profitability. So it's a hypothesis for, followed by an experiment design that is allowing you to test whether or not that hypothesis is valid. And you can apply this to all sorts of aspects of your trading. So it could be to do with your trend filters, it could be to do with your precise entry triggers, or it could be to do with your exits. It can even be to do with how many positions you hold in the market or how much risk you take on each of those positions. You see, my approach to trading, what I teach and the way I do it in my own portfolio for the last 15 years now is all systematic. The systems that I use are rules that I've designed and tested using back testing. And I've tested those over thousands of trades over many, many markets to make sure that they work. So it's more scientific than chart reading. For instance, let's say that you were a classical chart reader and that's how you made your trading decisions. You'd be looking at a chart and making judgment calls about, you know, where the trend was and when was a low risk point to enter. Or you could be a technical analyst and you're looking at lots of different indicators and let's say you have your chart and you plot all your favorite indicators and you know, you look at three or four indicators and you weigh up the weight of the evidence and you make a decision. Both of those are somewhat subjective, in which case I completely agree with you. Trading is a skill if you approach it that way. But if you approach it systematically and you're building objective rules to, to determine when you buy and when you sell, when you enter and when you exit the market and how much you buy, your position, sizing, if that's all defined by objective rules that you've back tested, it's much more scientific than skill based. Now both ways can work, don't get me wrong. So I'm not necessarily challenging your trading approach, but what I've found in my experience teaching and interacting with hundreds of traders is that most people find it really hard to develop that skill to read charts and to use indicators subjectively and they just end up losing all of their money. I've had much more success in my own account and with students learning how to back test and trade systematically. And in my view that's far more scientific. Thus the claim in the post that you've commented on. So I hope that helps clear it up. If you have any questions, feel free to comment below.
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