Friday, October 07, 2016

What traders could learn from Formula 1

There is an old maxim in racing that you need to be on the right tyres for the weather and the track conditions at that moment in time.

When Lewis Hamilton is on track, and sees a load of dark clouds suddenly appear overhead, he doesn't go sprinting into the pits to get his car fitted with rain tyres.

No, the teams wait until the rain actually starts and the track is wet enough to change tyres. If they didn't, and the wet tyres were bolted on, they will quickly wear out if the rain doesn't arrive, or gets delayed (this is as they need water on the track to avoid losing the tread or overheat).

Should they put the rain tyres on and it doesn't rain, or before the track is wet enough for those tyres, that's their race ruined.

In some cases, the rain may actually start, but not sufficiently to dampen the track enough, and the drivers can continue to race on 'dry' racing tyres.

The teams have traditionally employed 'spotters', who may be at the far end of the circuit, or even stationed a few miles away, and can radio in advising of changes in weather, or the start of any rain.

Nowadays, while they also have sophisticated radar systems on the pit wall which can tell them not only the timing and direction of the coming rain, but also the intensity, they still don't have 100% accuracy.

Even with the spotters and the radar, the F1 teams react to the weather - they do not predict. 

This is no different to trend following. Think about it.

5 comments:

  1. Wow this is a great analogy to trend following. I didn't know the particulars of F1 tire tactics. But that comparison definitely rings true. I'll never think of F1 the same way again. Thanks!

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  2. Sometimes even it rains, not the whole track will be wet. Some areas will be dry. Then team managers will have to make quick decisions whether to change tyres. In addition, they do refer to early tyres changes drivers to see how it affect the lap time. And please do not forget, track conditions and weather change every minute, like market does. Like Dr. Brett Steenbarger stresses, adapting to changes is a must to survive.

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    1. Hi Bryan - thanks for the comment. Yes, you can get such situations. A classic example was the German GP from 2000. Half the track was wet, the other half bone dry. There was another curve ball thrown in that race - a disgrunted ex-Mercedes employee started wandering on the track with cars doing 200+ mph. As Murray Walker used to say "Anything can happen in Formula 1 - and it usually does!". It is EXACTLY the same with the markets. To think otherwise is wrong. You may an edge, but all that gives is a probability skew, but its never foolproof. You never know what will happen. However, I think the general principle of reacting to what you see in front of you (As Ed Seykota says, trade in the moment of 'now') puts things in your favour better than trying to predict, which is what trend following strives to do.

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  3. First time visitor to your website. Great analogy. Very helpful. Thanks.

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    1. Thanks T J33A. Hope you enjoy the site!

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