The scientific method is a fact finding method of gathering knowledge that was developed in the 17th century to search for the truth for cause and effect relationships in science. This method requires observing along with skepticism about what is being observed. Cognitive assumptions can be biased and filter how someone interprets information so a filter for facts is required.
The scientific method requires creating hypotheses using induction because of observations. Experimental testing and measuring results for a hypotheses help determine what is true. Continued refinement of theories along with elimination of false hypotheses after uncovering cause and effect relationships and facts leads closer to the truth. These principles of the scientific method are used through a series of steps for all scientific enterprises.
Here are the steps of the Scientific Method that can be used in trading.
1. Ask a Question
All discovery must start with a question you want to seek out an answer for the markets, your own trading, or a trading system.
2. Do background research
Look at the historical data you need to answer your question. This may be in historical price action, visual charts, fundamental data, or your own trading records.
3. Construct a hypothesis
A hypothesis is your theory on how things work and what will work. It is your answer to your original question that provides and assumption that can be tested to see if it is true or not.
4. Test with an experiment
Your experiments will test if your theory is correct and your hypothesis is right or not. It is crucial your experiment is an accurate test inside the context of what you are seeking to find out. Experiments should be completed enough times to ensure that your results weren’t lucky or random but factual.
5. Analyze the data for a conclusion
Once your research is complete you analyze your data to see if it supports your original hypothesis or not.
6. Communicate your results
The final step is to quantity your results and also what you now know to be true. Also see how you can use what you have learned to created a trading system with an edge or improve your own trading.
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