OBJECTIVE LINEAR MODEL (STRATEGY TRADER)

For the Objective Linear Model, the researcher developed an objective model
based on historical tests and observations to predict results. This is defining and
using quantifiable data, running historical tests, and then using the results of the
tests to predict future outcomes.
For instance, the researcher would look at reams of physical data from cancer
patients, and correlate the data with how long the patient lived. After running the
historical tests, the researcher would then obtain the physical data from a cancer
patient, and using the historical test data, attempt to predict how long that cancer
patient will live.
This is exactly what a strategy trader does. He runs historical tests and then uses
that data to take a position in the market. He uses objective, quantifiable data
tested historically to make his trading decisions. Table 1 shows the results of the
tests.
In every case, the Subjective Linear Model outperformed the Intuitive Prediction
Model but only by a small margin. If you look at predicting the changes in stock
prices, the Subjective Linear Model only slightly outperformed the Intuitive
Prediction Model. This correlates very closely with my experience in trading.
Technical traders do only slightly better than discretionary traders and neither of
them make much money. While the difference in expertise and experience
between a discretionary trader and a technical trader is substantial, the resulting
profitability is hardly noticeable.
The real insight from this study comes when we look at the results of the
Objective Linear Model. In every case, the Objective Linear Model outperformed
both the Intuitive Prediction Model and the Subjective Linear Model. In some
cases, the improvement was minor, and in others it was substantial. It is
interesting to observe that the greatest improvement came when using the
Objective Linear Model in predicting the changes in stock prices. Here was the
proof I was seeking—a definitive study showing the benefits of objective
decision-making as opposed to other forms of decision-making.
This is my experience as well. The greatest improvement in trading results
(profitability) comes when a trader begins to use objective quantifiable data and
does historical tests to develop trading strategies. In this study, this is confirmed
not only with changes in stock prices, but in the other disciplines also. If there
ever was a case to be made for considering strategy trading, this is it.