Why Invest and Trade
When it comes to the matter of investment and trading, people have varied perspectives. Depending on the objectives, suitable methods for investment and trading also differ. Investment and trading involve systematically buying low and selling high after conducting research and analysis. If one merely invests in assets based on hearsay or recommendations from friends and family, the element of gambling is high.
Investment involves holding assets for a longer period to appreciate or preserve value. The goal typically is to pursue higher relative returns, such as outperforming the stock market indices or beating the inflation rate.
Trading involves buying and selling over shorter periods to profit from price differences, with the additional option of short selling. In essence, it is a zero-sum game, with the goal usually being absolute returns — the higher the profit, the better.
Searching Legendary Holy Grail
Many participants in the financial markets are constantly in search of the legendary Holy Grail. Here, we share some relevant perspectives:
The financial market is an endless intellectual puzzle, fundamentally an open-ended question. Typically, strategies are developed by backtesting historical market data. Therefore, as long as the future evolves in a manner similar to both in-sample and out-of-sample data during backtesting, a strategy can perform as expected. Following this logic, we come to understand the core question in developing trading strategies in financial markets: Does it make sense to backtest and develop strategies using data if the future does not replicate past events?
There are two aspects we can consider. First, markets evolve in a gradual manner; for instance, market makers base their order prices on current market prices. Other market participants also assess entry and exit points based on recent market conditions. Therefore, market prices often correlate with recent prices in the short term and usually do not undergo serial significant changes in a short period. Second, when one asset moves significantly differently from its behaviors in backtesting, relationships between multiple assets may still persist. Hence, multi-asset strategies may still have the potential to maintain good performance. In summary, when unexpected changes occur in a single market, diversification of strategy logic and traded assets can help spread risks. Comparatively, it can be challenging for strategies using a single asset and logic to maintain stable performance.
Considering the nature of financial markets and the core issue in strategy development, if one can consistently add effective strategies and maintain diversity, such a trader may be considered the Holy Grail.
