Sunday, 17 August 2014

History binds and tears apart

21:07 Posted by The Thalesians (@thalesians) No comments
The recollection of facts might seem like the overriding objective of history, to the causal observer, such as myself. My world is coloured by maths and markets, an inevitability given my education was in the world of maths and my entire professional career has been in currency markets.

To some extent, history's objective is this. However, even for someone quite removed from being a historian such as myself, the study of history seems far more important than a simple reallocation events. It is the question of "why" events have occured, which is the focus of historians. The ancient Greek historian, Herodotus was the "father of history". This title was bestowed upon him by Cicero centuries after Herodotus wrote his epic series of books entitled "The Histories" or "The Histories of Herodotus". Herodotus recounts the Greco-Persian wars in the fifth century BC in his epic work. The first volume begins with the following words:

This is the Showing forth of the Inquiry of Herodotus of Halicarnassus, to the end that neither the deeds of men may be forgotten by lapse of time, nor the works great and marvelous, which have been produced some by Hellenes and some by Barbarians, may lose their renown; and especially that the causes may be remembered for which these waged war with one another. (Herodotus & Macaulay/trans, The History of Herodotus, 1890)

Herodotus thus stresses that his book is not merely a recollection of the wars fought between the Greeks and the Persians. More importantly, he seeks to understand why they fought. If we can answer the question of why, it enables history to spirit our minds away to that place where we can learn from the mistakes of the past. However, history can also have the power to perpetuate the mistakes of the past, reminding enemies precisely why they always hated each other, using previous arguments to rerun grievances anew. We need not stray far in the modern world, to see this in the Middle East today, where conflicts have been repeated over time, like some sadistic version of Groundhog Day: wars are fought, no side wins in that fabled place called the "long term", thus setting up enemies to rerun the fighting for another day...

It is all a matter of degree. The question is thus: when does history pivot from an understanding of the past, to a glorification of mistakes? Indeed, when does history become not a power to bind but in fact to tear apart?

From a market perspective, understanding how markets have behaved in the past is crucial. Experience serves as a subconscious history of the past. However, experience is just one facet of history. Just as historians analyse the past, so traders can also seek to understand the past, through the judicious use of market data. That is of course what systematic traders do. They use a historical dataset to verify the behaviour of systematic trading models. However, simply reeling off the historical returns of a strategy or a market is just one part of historical market analysis, but should not be the only one.

Just as Herodotus sought to understand "why", so traders need to understand "why" a strategy or a market behaved in a certain way. Simply using strong historical returns of a strategy to justify it going forwards, without having some comprehension of "why" it seems to capture market dynamics is risky. After all, we might simply be indulging in a glorification of trading "mistakes" which just so happened to be profitable? Now you wouldn't want to be placing your money on an idea like that, would you?

History is there to inform and understand, not to justify the mistakes of the past. Good luck trading!

My book Trading Thalesians also has some colour on understanding trading history (mixed in with a bit of ancient history).


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