Milktrader

Iterating Until Convergence

Sunday, April 4, 2010

System Trading Game Theory: A Robust Metaphor

Metaphors are tricky things to play with. They serve a purpose to illuminate relationships in terms we are familiar with, but for those who insist on taking every little thing literally, they are deadly. Every reader of literature understands that metaphors break down at some point, but they are fine with that. Suspend your disbelief for a moment, and you may gain some useful insights. With this forewarning, I present the System Trading Game metaphor. You can think of a game as chess, golf or the 100-yard dash. We are interested in how well a player plays a game. We'd like to know a few things about their natural ability, their ability to improve their performance and their actual game-time record.  We are interested in these factors because we, as system traders, decide what players to play in what game and how much playing time they get.