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Finance, mathematics, and computer coding are inherently linked in the modern investment arena. The use of algorithms to trade financial instruments has been around for decades, but has proliferated in recent years due to the abundance and relative affordability of data and computing power. This development has irreversibly changed the investment landscape and investors such as Toby Carrodus have harnessed the power of finance, mathematics, and coding to create a systematic approach to trading. Carrodus, a global investor and quantitative analyst, trades derivatives markets – specifically, futures on bonds, short-term interest rates, commodities, equity indices, and currencies. The niche he works in is called medium frequency systematic global macro, which trades all of the aforementioned using algorithms that update at frequent intervals throughout the day – and night. Thankfully, the computers running his algorithms don’t need to sleep, or get tired or emotional for that matter, which is a large advantage of his systematic, data-driven and objective approach to trading. Like other quantitative analysts – nicknamed “quants” – Carrodus focuses on identifying profitable investment opportunities and managing risk.
Multi-Millionaire Investor Toby Carrodus Says Humans Are Flawed in Relying on Gut Instinct Carrodus doesn’t espouse the gut-instinct mentality that traders have traditionally relied on. He has found that a systematic approach overcomes many of the flaws associated with discretionary trading. Namely, that discretionary traders’ decision-making abilities are highly influenced by their moods, they can only focus on a few financial instruments at a time, they calculate much slower than computers and they require sleep, not to mention the numerous biases humans are subject to when making decisions, particularly under pressure. One such bias that discretionary traders succumb to is the belief that being glued to the news and collecting more information will lead to better results, Toby Carrodus says. Carrodus points to examples and studies that prove otherwise. He cites the work of German professor of psychology Gerd Gigerenzer, who found that simple rules of thumb known as ‘heuristics’ can outperform the discretionary judgement of so-called expert stock pickers. “By having a set of rules in place, you can focus on the essentials and make decisions based on data and evidence, rather than being swayed by emotions or outside factors,” Carrodus explains. “A systematic approach to trading can help cut through the noise and distractions that come with being constantly bombarded with financial news and reports.” Carrodus references the 1952 publication of “The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology,” which sheds light on the limits of human reasoning. Written by Friedrich von Hayek, Nobel-prize-winning economist, the book postulates that humans cannot access all facts and variables in situations because of their finite mental capacity. Instead, following rules can result in better outcomes than using discretionary judgment, Hayek wrote. As Toby Carrodus points out, this human blind spot is particularly relevant to the trading world. “By relying on rules and systems, we can overcome our cognitive limitations, improve our outcomes, and free up mental capacity to focus on more important issues,” he says. Toby Carrodus Says Investors can Broaden Their Bandwidth by Using Technology In a recent interview, Toby Carrodus explained why adopting a systematic approach leads to more consistent and profitable trading results – especially when leveraging technology. The tool of choice for many modern traders is the Python computer language, which Carrodus mastered on his own. “Harnessing the power of computers in an age of such technological advancement has allowed me to ride that wave rather than being run over by it. Every day you wake up with a chance and a choice. I decided back then I was going to teach myself how to best integrate technology into my career and do my best to stay at the cutting edge,” Carrodus explains, calling his mastery of Python his biggest career leap. “The power of technology and adopting a systematic approach to trading have shaped my career,” he says. Carrodus has also mastered Pandas, a software library of tools in the Python ecosystem. To the uninitiated, Pandas is an abbreviation for ‘Panel Data,’ a form of structured data. Working with Python’s programming language, financial experts like Carrodus can use Pandas to prepare and analyze data to construct portfolios and perform quantitative analysis. Indeed, algorithmic trading would be impossible without a programming language. Carrodus says, “We are moving towards a world of automation, so there is a demand for people with a programming language experience.” Toby Carrodus Encourages Traders to Embrace a Systematic Approach and Avoid Whimsical Decisions The systematic approach eliminates many variables affecting a trader who makes decisions on a whim, as humans often do. Toby Carrodus has observed that by using data and computers, one can yield much greater returns for the amount of risk taken. In his career, he has witnessed systematic strategies generate vastly superior risk-adjusted returns compared to the gut-feel approach of discretionary trading. Discretionary traders can fall prey to the whims of the market. “The market does not care if you’re sick, tired, going through a divorce or if it’s your daughter’s birthday,” Carrodus says. “The market is not going to wait for you. However, all of this will influence how you make decisions. By trading systematically, one can minimize a lot of this bias.” “A system does not have emotions,” Carrodus says. “If you have a computer running your trading system, a computer does not get tired, emotional, or hungry. A computer simply will do what you program it to do, 24 hours a day.” |
