Applying Moneyball Principles to Trading

Applying Moneyball Principles to Trading

One of my all time favorite movies is Moneyball featuring Brad Pitt. What’s not to love? The movie is about how the general manager Billy Bean of the Oakland A’s turns his club on it’s head by using quantified principles to maximize the smaller budget that his team had to work with higher scoring output. Billy Bean hired a quant to analyze things that were more important than the scouts opinions. He found inefficiencies in how major league baseball under priced players that achieved getting on base at more at bats and ones that garnered a large amount of walks. They also found value in players with great statistics but did not look the part physically, had odd techniques, older players past their prime, or players that had been injured. They were looking for getting the most value for their money based on the math not the opinions of a scout or someone who just knew they liked the way a player looked.

The Oakland A’s were able to have a record setting winning streak and make the play offs have a much price tag for wins and scoring than the bigger ball clubs. What I really loved was that these principles evolved from the theories of Bill James who invented sabermetrics while working as a security guard in a cannery and was eventually hired by the Boston Red Sox.

What can the Moneyball principles teach us about trading?

  1. Quantify, quantify, and quantify some more. Trade based on the facts of a proven trading system and a trading plan. Entries and exits have to have valid reasons not opinions, predictions, or gut feels. Have good reasons for your position size and where you place your stop losses.
  2. Isolate the most important principles and concepts for your method of trading that will make you the most profitable and look at the most efficient ways to implement and maximize those principles. Small losses, maximize win size, improve winning percentage, limit drawdowns, eliminate  the risk of ruin, get the maximize return on capital at risk, reduce stress, increase discipline, create the best risk/reward ratios, know when the market favors your method, pick your trades and market carefully, only trade tight bid/ask spreads that have liquidity.
  3. Understand the random nature of results. Understand what your edge is over your competition and trust that your edge will play out over the long term if you stay disciplined with your process.
  4. Take advantage of inefficiencies in pricing. Look to get a good value for your money and take advantage when someone is letting an asset go at a price that presents a great risk/reward ratio for your entry price.
  5. Always look at ways to adjust your method to get the maximum efficiencies from what you do. Be dynamic and willing to make the right changes to improve your performance based on your own principles.