There are many kinds of engineers in the world. In fact, given the vast variety, it would be an effort in futility to try and name them all. But what does it really mean to be an engineer? And the bigger question: how exactly is this related to trading? A good friend of mine who is an engineer said, very aptly, “Scientists do the work of God; engineers do the work of man.”
Although I am not sure he can claim that quote as original, there is nothing better to describe what engineers do. Being an engineer is a mindset. You must be able to solve problems and build mechanisms in the imperfect world of man. And often times, those conditions are far from ideal.
And that is exactly the state of mind you need to build a profitable trading strategy, whether discretionary or algorithmic. So, if you are an engineer, that’s great! This article could help leverage your experience in trading. And even if you’re not, you might still learn something useful.
Engineers define the project in detail
If I were to ask an ordinary trader what trading strategy he plans to build, what might be the answer? More than likely I’d hear that he wants to build a strategy that is profitable. And while that it is, naturally, the ultimate goal it’s hardly enough to build a successful strategy.
If I were to ask an engineer the same question, however, I’d surely get a very different answer. Engineers define each project they’re working on in great detail. In our case, then, the trading strategy they’d likely wish to build would have a number of inputs. An engineer’s definition of a strategy might be something like this:
Strategy Interval: 1-3 Days
Maximal Drawdown: 20%
Value at Risk: $500
Target Profit Limit: 100 to 150 pips
Target Stop Loss per Trade: 50 to 75 pips
Target Win Ratio: 50%
By having these very detailed parameters, the engineer already knows several things. First, that he has to design a trading strategy that’s built on momentum (rather than something else). Second, it has to have a maximal draw down of 20% with a maximum risk of $500 at any given time. Third, each trade has to have the potential of at least 100 pips and a stop loss of maximum 75 pips. And fourth, in the longer run, at least 50% of all trades must be profitable.
Clearly, an engineer doesn’t choose a trading strategy arbitrarily. He already knows exactly what he wants to build and chooses all the tools (moving average, etc.) and strategies accordingly. Sure, it does not guarantee he will be successful. And he may eventually have no choice but to change his targets. After all, he is doing the work of man where nothing is perfect.
But the point is that setting a plan in detail narrows irrelevant options. Therefore, everything is more result-oriented.
Engineers anticipate what could go wrong
Most people, when they have a good trading strategy, think about how much money they can make. You know, they dream about how good it can get. But an Engineer’s natural instinct is just the opposite. Instead, an Engineer is trying to figure what could go wrong.
An aeronautical engineer would test an airplane in extreme weather to ensure it doesn’t crash. Similarly, an engineer building a trading strategy will test it for failures. The end result, of course, is that the engineer will build a better and safer strategy.
Engineers are open to ideas
When there is a particular mechanism of functionality to be filled an engineer looks first for a readymade mechanism. In trading, for example, it could be finding a good tool to identify volatility. Or perhaps a good signal for momentum. Once found, provided that it is acceptable, an engineer will incorporate it in his strategy.
An engineer will not be fixated on investing his own idea. Engineers do not believe in re-inventing the wheel. Simply put; if it works, it works.
Many engineers might now realize they already have the mental tools needed to succeed in trading. They just need to implement their ingrained work habits and apply them properly. And many successful traders will find that they have already implemented the lessons learned here.
Engineer or not, successful trader or not, it’s never too late to learn how to think “smarter.” In the long run, it will enhance your trading strategy.