A Chess Grandmaster and Trading Strategy

Last Updated on March 12, 2019 by Mark Ursell

What Picture are We Painting?

Playing chess is like trying to paint a masterpiece while someone is tugging at your sleeve

Gary Kasparov

On June 21 1999, Garry Kasparov began playing a chess match he would later describe as the, “greatest game in the history of chess”. The game was Kasparov verses the World.

This single game lasted four months and Kasparov stated that he had never expended so much energy on any other game. The World Team was guided by four Grandmasters and each move was decided by a public vote. 50,000 people took part in the World Team and an online strategy board allowed them to discuss potential moves.

Kasparov is considered by many to be the greatest chess player of all time. And he did eventually win the game. However it was a huge struggle for him. Given the combined intelligence arrayed against him, Kasparov was only able to triumph because of his deep understanding of chess strategy.

I really like his poetic description of a game of chess as a potential masterpiece. This is a beautiful analogy and it could also apply to trading. But most chess players will admit that they are not painting great pictures. They are simply trying to win the game in front of them. This is the same for most traders. In fact simplicity is often better.

Chess players normally have to deal with one opponent at a time. As traders we are often playing in a game with 50,000 other people. But unlike Kasparov verses the World, in the financial markets 50,000 people are all playing each other. This makes it easier for an individual trader but also much more complicated than a game of chess.

Traders also have to deal with unusual price moves, panicky headlines and relying on over-confident analysts.

Like Kasparov, the only way we can win this game is through a deep understanding of our strategy.

What Results are We Getting?

However beautiful the strategy you should occasionally look at the results

Winston Churchill

On June 22, 1941, 140 German divisions crossed the border into the Soviet Union. The speed of the moved shocked Stalin. And it dragged the Soviet Union into the war on the side of Great Britain and her allies.

Churchill’s strategy in the early days of the war was to protect Britain’s allies and strike back when possible. But by the middle of 1941 the British had not had much success. They had witnessed countries across Europe fall to the German forces. Churchill realized that this strategy was not going to be enough. He realized that Britain needed more allies.

As soon as Germany attacked the Soviet Union, Churchill recognized the opportunity. He firmly allied himself with Stalin. On December 7, 1941 Japanese forces struck Pearl Harbor. Four days later Germany declared war on the USA and the alliance that would beat Germany was formed.

As traders we need to have a strategy that delivers the results we want. It is no good relying on a a beautiful strategy. Like Churchill, we might need to recognize that it is not working. Or does not go far enough.

Don’t Confuse Strategy with Tactics

Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was. Weapons change, but strategy remains strategy

Reminiscences of a Stock Operator

Jesse Livermore was possibly the greatest trader of all time. He made a huge amount of money during the panic of 1907 and the Wall Street Crash of 1929. Livermore learned the business of trading at an early age and achieved spectacular success. The above quote shows he had a good understanding of the importance of strategy.

Anyone who has been trading for a while will probably agree that: having a strategy is important for traders. But I think that most traders would not be able to explain their strategy. If pressed they might say something like: “buy when the P/E is less than 15” or “sell when the price is lower than the 200 day moving average”.

Livermore used lots of different tactics to achieve his aims. He was a brilliant tape reader and understood market psychology. But as he states above, the strategy stayed the same. His overall strategy was simple: buy during a bull market and sell during a bear market.

Objective – Strategy – Tactics

Objectives

Our objective as traders is quite simple – to make money. If we don’t make money then we stop being traders. Everything else: lifestyle, self-image and our understanding of the financial markets becomes irrelevant.

Strategy

To make a strategy we need to identify how we are going to achieve this. I am a systematic trader and I spend lots of time developing and testing trading systems. I am always thinking about how to refine and improve my systems. If you are interested in developing and testing your own strategies have a look at the Tradinformed Excel Backtest Tools.

There many different metrics that people use to compare different strategies. To keep this simple, the strategy could be:

• Constantly increase the number of winning trades. Reduce the number of losing trades.
• Constantly increase the amount we win per winning trade. Reduce the amount we lose per losing trade.

Tactics

Now we have defined strategy we can focus on achieving this. Using the above strategy to guide me I can work out how to achieve my aims. My tactics might include:

• Recognize what type of market we are in. Adjust our approach depending on different conditions.
• Trade in the direction of the dominant trend.
• Enter on a retracement.
• Look for opportunities to buy when the market is oversold and sell when the market is overbought.

Further Resources

The Tradinformed Shop contains resources to help you develop and test your own systematic trading systems. To get ideas for strategies have a look at the Trading Strategies page.