Are Mathematical People Better at Trading?

Many people reading this will wonder what the connection between mathematicians and financial trading is. There is no need to wonder; a lot of financial tools, software, indicators and expert advisors were derived from mathematical and statistical calculations. Take for example the Fibonacci number sequences. The Fibonacci numbers which form the basis of the Gartley patterns, the 1-2-3 reversal pattern, the Gann angles and the retracement/extension tools, are all statistically derived number sequences.

There is perhaps no better confirmation of the importance of mathematics in financial trading or betting than the story of “The Man Who Broke Atlantic City”, Don Johnson. Johnson raked in $6 million in one night playing Black Jack and in the process, walked away with the monthly revenue of the Tropicana casino. This was after taking in millions of dollars from two other casinos. The secret of his success as he attested to in a documentary made on CNBC, was his association with mathematics professors who taught him the skills of how to use mathematical formulae to turn the odds in the casinos to his advantage. A lot of Don Johnson’s playing skills by his own admission, came from calculating his odds against that of the house.

Financial trading is a zero-sum game. When someone is losing, someone else is winning. When someone is selling off a position, someone else is buying it. The aim is therefore to be able to calculate the odds of walking away with profits and knocking other participants out so hard, they would never know what hit them. The question here however is whether the maths geniuses involved in financial trading (the Quants) are actually better at it than the old Gordon Gekko-style traders. These days, 70% of all trades in the financial markets are being executed by software and algorithms that have been programmed using mathematical formulae designed to create accurate and speedy execution of trades beyond the level of human intelligence.

The role of mathematics in trading is being increasingly recognized. It all started with “Beat the Market”, the 1967 book by maths Professor Edward Thorp. Thorp would later become a hedge fund trader who ended up beating the market black and blue with his formulae and raking in a fortune. Jim Simons was another example of a scientist who ended up being very successful with his Medallion hedge fund, raking in a personal fortune of $10 billion.

There are lots of examples of mathematics gurus who have turned to financial trading and made a success out of it. However, these represent just a fraction of the number of maths people who have tried their hands at trading. It is very likely that for every successful maths guru who has made it in trading, there will probably be hundreds more who could not make the cut in the financial markets.

Mathematics is only one aspect of trading. Trading also includes things like knowing when to execute the strategy. Therefore while mathematical people may have an edge over others as a result of their trading, they do not necessarily become better traders than others. They will still need to pass through the training processes that others follow to turn their maths skills to money.

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