Which Domain Is Closest To Trading?

Rarely do any of us grow up learning how to operate in an arena that allows for complete freedom of creative expression, with no external structure to restrict it in any way. In the trading environment, you will have to make up your own rules and then have the discipline to abide by them.

— Jesse Livermore

The main reason Trading in Financial Markets is not considered as a profession is because of the seemingly high failure rate. This discussion can be very long so let us start comparing Trading to other domains:

  • Poker (or other betting systems)
  • Chess
  • Military Combat
  • Poetry, painting (or other arts)
  • Tennis, cricket (or other sports)
  • Accountancy

Apparently accountancy goes farthest from trading since it is most deterministic among other domains. Poker is undoubtedly considered closest by professional traders. Let us consider Chess:

Chess: A Valuable Teaching Tool for Risk Managers?

By Igor Postelnik

“Let me dispel a myth that chess is a deterministic game with full information available to both players. In theory, this is true. However, in practice, it is hardly ever the case that a player sees all possibilities at once. And even if he or she actually sees them, it’s hard to predict how well an opponent will react to them…”

In this excellent article Igor, once a national chess master and vice president in Bear Stearns’s global clearing services risk control group, goes out finding similarities between the two:

“(1)In risk management, an analyst takes a first look at a fund’s portfolio (chess position) and has to make a first move (approve for leverage). Once a certain level of leverage is approved (the first move is made), we have to consider how the portfolio manager will respond — as well as what factors will cause the trader to complicate the position (increase risk in the portfolio) and, when that happens, how the risk manager should respond. There are other similarities between chess strategy and risk analysis. (2)Under time pressure in a tough position, a chess player has to choose a move, while a risk manager has to choose a position in the portfolio to liquidate to meet a margin call when a portfolio is tanking. (3)Chess players also study opponents’ games trying to anticipate how the next game will develop, while risk analysts study clients’ portfolios trying to anticipate how the next trade will affect the portfolio. If we can determine, for example, what strategy a portfolio manager will choose next, proactive steps can be taken to keep a firm’s current portfolio exposure reasonable (even when current exposure does not seem excessive) and to avoid unnecessary calculations.

“(4)if a fund is outperforming its benchmark, why use more leverage? But if it’s underperforming, why not use more leverage?….Thus, using very little leverage, the world champion retained the crown.

“(5)Sometimes you have to consider the intentions of other entities and their responses to your moves. Sometimes the strategy that can be proven to be optimal with infinite computing resources (or perfect information) is a terrible strategy in practice. In these situations, a chess master may have better insights than a poker, bridge,  backgammon or gin rummy champion.”