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Mathematics And Trading

math

You could be forgiven in thinking, if you watch movies showing mathematical prodigies solving everything from finding a killer to winning in Vegas, that on its own, mathematics will help you conquer the stock market. Don’t be fooled! If this fiction were fact, someone would have done it by now. However, it’s undeniable that mathematics can help you do better in stock trading as long as you can recognise risks and probabilities.

In trading, the ability to think on your feet maths-wise (e.g., 17 * 35) is more important than in other financial fields because you need to make quick decisions. In trading, some funds may use advanced algorithms and higher-level mathematics to make trading decisions. Therefore, advanced mathematics classes may be helpful if you have graduate level maths.

Probabilities

tradingRisk management is of paramount concern to every trading organisation. Risk is one of the most complex mathematical notions ever conceived and must be grounded on probability and its dynamic processes. The use of probabilities in mathematics cannot predict the actual future, but can calculate the probability of events. This works in the stock market by helping traders minimize the likelihood of loss before a certain date or other precursor.

Successful stock traders such as Warren Buffet often give the impression that successful trading means 100 percent accuracy. But most successful traders are right only half the time at best. Mathematics, teamed with patience, builds stock market wealth more reliably than “big score” attempts.

Gaussian Laws versus Power Laws

Gaussian mathematics calculates random fluctuations of uncorrelated entities. This is not ideal for trading in the stock market as all transactions are correlated. This means that you cannot predict sudden crashes with Gaussian logic. However, Power law calculates how changes in the value of one quantity affects another quantity, such as how a company’s value affects stock prices in its industry. This helps calculate standard deviations, which can help traders better understand potential risks and allow them to buy or sell accordingly.

Quantitative Analysis

“Quants” are traders who use quantitative analysis to make financial trades. Computer-based quantitative analysis, which studies how amounts, or quantities, relate to each other, is the most common mathematical model used by trading houses. Quantitative analysis includes algorithms that can review behaviour patterns in the financial market. These calculations can help identify potential risks ahead, but have a risk of creating wild speculation and crashes.

Tests when applying to be a professional trader.

There are tests you’ll need to pass before you’re allowed near a dealing room. Two of these tests are a challenging mental calculus test and a logical sequence test. Not all companies test, but it’s likely you’ll be required to show you can match the scores stated in your resume. So be honest.

There are simple tricks to help you to perform complicated calculations in your head. In the case of 15*37 mentioned earlier, you can move the decimal place over one to 1.5*40. This can be broken up in to 1*40 + 0.5*40, or 40+20=60. But remember to move the decimal one place so its actually 600. As the question is 15*37, not 15*40, we need to subtract 3*15. Hopefully you can figure out 15*3 = 45, but if not you can also use the same trick of moving the decimal place (e.g. 3*1 + 0.5*3 = 3+1.5=4.5). Therefore, 600-45 = 555 is the correct answer.

Make a conscious effort to make sure all your actions in the market are logical and not emotion based. A key element to successful trading is to be disciplined and realistic. These talents are more important than your intelligence or your ability to understand complicated mathematical trading algorithms or any other similar trading “tool”.

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