The Fisherman And The Hypothesis

I have done some fishing. Not much, but some. My father-in-law has done a whole bunch, and from the stories he tells me fishing is a lot like trading. Because it is not about landing a fish with every cast, it is about tolerating lots of nibbles in the anticipation of landing the big one.

For the scientific fishermen among you, you can also think of trading as hypothesis testing. Each trade entry is an hypothesis, a proposed explanation for a phenomenon. You are hypothesizing that a market is about to move in a particular direction. It is pretty testable too: the market will tell you pretty quick if your hypothesis is correct. Or not.

Fishermen and scientists are wrong a lot. As a trader, you should expect to be wrong, to be wrong often, and occasionally you will be spectacularly wrong. Michael Jordan has a fabulous perspective on the subject:

I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.

Searching for the winning trade is a process of casting, failing and re-casting until the fish is hooked. The successful fisherman will cast and fail more times than the novice fisherman who gives up and goes home early. The successful trader will lose more often than the unsuccessful trader, precisely because the unsuccessful trader does not stay in the game.

Tim Harford describes how a complex problem can be resolved by an approach that incorporates a willingness to experiment:

The process has three components: First, try lots of different things; Second, make sure the experiments are at a small scale so that when things go wrong, it’s not a catastrophe; Third, make sure there’s a reliable way to tell the difference between success and failure.

Besides being pretty much the opposite of how government works, this concept is directly applicable to trading: Try lots of different things, make sure that all the things you try are small enough to not blow you up if they go wrong, and check regularly to see if these things are working.

Regular readers of this blog will know that I am comfortable with failure. I fail everyday, more than once. But that is okay because it is part of a process of progression. Seriously trying for success requires exposing yourself to the risk of failure. Expecting to succeed without experiencing failure is naive. Experiencing failure is fine, as long as it is part of a process that leads to success. The fisherman knows that, and so does the successful trader.

Posted by thezikomoletter on September 12, 2012

https://thezikomoletter.wordpress.com/2012/09/12/the-fisherman-and-the-hypothesis/