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Trading Strategy Design

Analogies Between Chess and Trading, 11/28/06
Or, Ode to GM Nigel Davies

Some analogies between chess and trading:

The various patterns we iterate through are the same as the multiple lines a GM explores in a chess game

The way we weight the probabilities of the various patterns is the same as a GM would weight multiple lines in a chess game

Simplifying multiple trading positions (e.g. 2 multiday and 2 intraday down to 1 multiday), is similar to how a GM might simplify a chess position down to an endgame (e.g. two rooks vs king and bishop)

Alternatively, rolling multiple patterns into a single compound pattern is the same as a GM simplifying a chess position down to an endgame

Finally, making a trade and playing a chess move are both the result of extended calculation into risks and probabilites

Here is a great example of this, a day (today) that showed three distinct trading 'lines':

Down x% yesterday

The first big move in n days

Down x% towards the end of the month

All of these trading lines play out w/ different probabilities and risks over multiple time frames. From chess back to trading, the problem becomes how to simplify these lines into a trading plan.

Viewed through the analogies of chess, every day becomes a game. As traders and system designers we know the opening book, we can guess at the likely transposes and we prepare for novelties and adversity realizing that finding the right move 'over-the-board' is extremely difficult in both chess and trading.

Henry Carstens
Vertical Solutions
carstens@verticalsolutions.com