Cyborg traders invade

September 2, 2015 10:55 AM

Unfortunately, depending on how you measure it, our understanding of market price action is between 60 and 120 years behind that of weather forecasting. We don’t have comprehensive models of how trading processes work, nor do we even have years of mathematical background on which to make these models. Weather forecasting could borrow from laws of physics, but traders have no such luck.

In essence, traders are performing 100% observational forecasting. This is no more advanced than predicting rain based on the volatility of wind variations and cloud patterns (sound familiar?). Our trading models are so simple that we could execute them with a pocket calculator. 

Previous attempts at implementing advanced models in trading were abandoned after a few years and significant losses sent the early adopters back to their comfortable, simple models. This time, there is great potential that things will indeed be different. Technology has advanced to the point where what once took months to calculate and test could now take days. Plus, there are signs that traditional tools are failing at a faster rate. This could mean the institutional trading community is prepared to invest whatever it must to better model and understand the markets.

New complexity

Don’t be misled. There is still risk on the table. Our creativity can still outpace the technology if, just as with weather forecasting, we can develop too complex models too quickly.

However, with care and measured moves forward, we can build better models (see “Tools to build 
on,” below). 

In a perfect world, we would integrate all these areas in great detail into our models. Unlike weather forecasting, many of these measures aren’t based on hard science. This is where artificial intelligence comes into play. It can help us uncover links to market price action.

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About the Author

Murray A. Ruggiero Jr. is the author of "Cybernetic Trading Strategies" (Wiley). E-mail him at ruggieroassoc@aol.com.