Trading as problem solving

Trading essentially boils down to the art of problem solving.

This may sound novel to some, but it is certainly true just as it is true that people who are not good problem solvers are more likely to struggle as traders compared to those with better problem solving skills.

I base this opinion on my own experience as a trader and on my interactions with dozens of prospective traders or students of trading. It is not hard to notice that those who are good at solving problems are doing better in the trading business than those who prefer someone else to solve their problems for them.

I will talk more about what kind of people make good problem solvers in a moment, but let me first tell you how exactly trading boils down to problem solving.

This is done in one of two different ways.

One is to reduce your trading to some algorithmic formula by designing a mechanical trading system which you then use to extract money from the market. The problem solving takes place before trading proper. Your job as a problem solver in this case is to analyze the past market behavior in order to come up up with a formula that would predict its future behavior well enough to be able capitalize on it. You can trade such a mechanical system manually or you can program it so that it is operated automatically by the computer.

The other way is the discretionary way and it is about learning how to handle the market in real time. It takes a good deal of practice to master this art, and you basically are expected to solve little problems each time you trade. With enough experience you are capable of doing so better and better, just like with enough experience you are able to solve math or physics problems you found to be totally beyond your ken the first time you encountered them. The growing knowledge of your market and relentless practice are the driving forces of success when it comes to discretionary trading.

The second way of trading may seem more challenging to some, perhaps even to most, but that does not have to so be in practice. There are some reasons for that. For instance, discretionary trading makes you learn faster than mechanical trading, for the latter is a very passive way of approaching the market and as such it leaves little room for growing as a trader. You grow professionally, you improve your skills by being active, and being a discretionary trader allows you, even forces you, to be more active in studying the market compared to a mechanical approach to it.

There is a saying that I like to repeat a lot, namely that "action creates clarity" and the more active you are, the faster you will be able to achieve the clarity that makes one a formidable problem solver or task handler or decision maker, be it a juggler or a day trader.

Some people excel at problem solving and some don't. I often try to discourage from trading those who I suspect are not particularly good at this task because I think that they will simply be wasting their time and money on it.

For instance, if someone is telling me that they are afraid of computers (technophobic), I try to persuade them to try something else or simply tell them that whatever I am may be offering on my site that pertains to trading is not something that I would recommend to them. Well, I may not be the shrewdest marketer you will ever come across, but dealing with unhappy people is not the best way to make me happy either, and since I also don't believe in maximizing misery, that works for me just fine.

The reason technophobic people are unlikely to be good problem solvers should be rather easy to grasp: they have an obvious problem that they failed to solve and the one that will seriously affect their trading of financial markets that these days is done almost exclusively via computers. I suspect the reason they have not been able to solve this problem, or, at least one of the main or common reasons, is their tendency to getting easily frustrated. Yes, technology is an unnatural thing and it may cause a bit of anxiety and fustration among some of us, but unless you are more prone to frustration than most, that's something you should be able to overcome rather easily.

Still, the issue of frustration is important to note in general when talking about problem solving because it's very much inherent in it. Problem solving always involves some degree of frustration, and the more complex the problem is, the greater this level is bound to be. Hence, if you are easily prone to frustration, you will not make a very good problem solver. That's something to keep in mind if you want to improve your problem solving skills: keep your frustration at bay because it's very counterproductive. Moreover, if you cannot control it, this also indicates a low level of self-discipline, another factor that affects your problem solving skills.

Anyone familiar with trading knows well that both frustration and self-discipline can make or break a trader and so that's yet another way how trading is related to problem solving. In other words, what defines a good problem solver, also defines a good trader. These are only two examples of such characteristics, but very important ones.

Good problem solvers enjoy problem solving even though that can be a tad frustrating. Or even more than that at times. That's because they thrive on challenge. And so do good traders.

Who makes the best problem solvers? Obviously those who enjoy problem solving, and especially those whose professional training involved a good deal of problem solving. Allow me to offer my personal example.

By training I am a mathematical physicist as my academic work (research) was in this field, the field of mathematical physics, broadly speaking. That means theeoretical physics focused on mathematical models. To become a physicist, you do need to practice problem solving. That's how you become good at physics. To become a mathematical physicist, you also need a solid background in mathematics, and that means solving math problems. You cannot become any good in this field (or fields) without a good deal of practice. The academic training in these fields prepares you to become an expert analytical problem solver. No wonder then that when I decided to parlay my academic training into a career in the industry, I found it rather easy. My training allowed me to land a job at some gaming company in Beverly Hills, where I was responsible for developing optimal strategies for various casino games. That obviously too meant solving problems, doing research, coming up with solutions. Eventually, I ended up as an e-mini futures day trader and have been one for over a decade now.

Quite a few people with my academic background (physics and math Ph.D.s) end up on Wall Street, where they usually work as quants and some may even start their own hedge funds. I talk about this a bit more in another article that you may want to check out.

Allow me also to offer a particularly good example of an exquisitely lousy problem solver. Not necessarily an abstract example at all. Say, someone who blew two of his trading accounts. You see, blowing the first account is already a sign that you failed to solve a certain problem, that of the proper preparation that involves designing a winning trading methodology in the first place. Blowing the second one is a clear indication that you cannot learn from your mistakes, and that's something that will make it very hard for you to become a good problem solver. In fact, it's virtually impossible to be a good problem solver if you cannot learn effectively. But you can always start a trading forum to perpetuate the misery of being a loser among the thousands of other wannabes equally singuarly poorly equipped to solve their own problems and hence in an ever desperate need of gurus.

And you have to be profoundly desparate or suffering from a brain fog of astronomical proportions to think that a guy who blew two of his trading accounts can serve as one. The trading guru, that is, and not the trading loser, if I did not make it clear enough.

If you don't think that you are a problem solver, then I strongly suggest that you become one. Make problem solving a habit. Take up a programming language, for instance. Everyone can do it and the benefits of mastering one are many. I suggest C++ or C# as you will find them useful for programming Sierra Chart or NinjaTrader, two popular charting packages.

We often spend a lot of time online on things that do not foster our growth in any way. We grow, we develop our life skills through solving problems. Don't shun opportunities to do so.

On the contrary, seek them out actively. Trading, as I have tried to explain in this article, offers one of such opportunities. But if you are not even willing to develop the mindset of the problem solver, then I am afraid that this not something you are going to enjoy. On other other hand, if you are willing to develop such a mindset, then you are going to enjoy many more things in your life, things that you would otherwise choose to avoid as perhaps too challenging to try. Yes, that takes some effort, but, as they say, "no pain, no gain." The more effort you put into something, the more you will get out of it. That's also how a glass that is half-empty becomes half-full. Not exactly turning water into wine, but a good start if there ever was one.

Posted on May 13th, 2014.