The battle between mathematics and man is never-ending. As a student, your only motivation for getting past the subject was the consolation that you would never need to apply the Pythagoras Theorem in your daily life. Now, as you sit down to consider your future as a trader, the haunting question arises: do traders need to be good at math?
Traders do not need to be a genius at math or know all the formulas. However, being good at basic mathematics such as addition, averages, and percentages will benefit. Trading is indeed a math business, but it is also one that involves intuition.
In this article, you will learn what type of math a trader needs and the extent to which they need to excel at it. Additionally, we have outlined a few other skills a trader should have to have a clearer image of the relationship between mathematics and trading.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Trading and Mathematics: How Far Does It Go?
Mathematics is a broad, umbrella subject under which comes many concepts. For a trader, mathematics does not have to be as complicated as trigonometry or calculus, so those who may find themselves tiptoeing around the subject can relax a bit.
You will notice we said a bit. While traders need not know how to calculate complex algebraic equations, they need to be good at basic math. Suppose you are a stock trader, where numbers and charts and analysis seem to be hanging over your head before making decisions.
In that case, it must be painfully clear that grasping concepts of addition, division, subtraction, and averages are necessary, not a choice. So if you want to kick-start your career as a trader and are the type to turn your nose the other way when math is placed in front of you, it is time for you to bite the bullet and brush up on some lessons.
So, what type of math do you exactly need to be good at to become a successful trader?
Statistics and Probability
Concepts that go hand in hand with trading to assess the likeliness of a stock rising or falling. Probability allows you to calculate the probable chances of an event occurring, and statistics will enable you to collect, classify, and analyze numerical data according to mathematical theories.
Data and numbers are generally understood better when organized based on probability, such as stocks most likely to rise during the week or stocks most likely to have the highest trading volume. This is where probability and statistics combine to create a clearer understanding of the financial markets; when you enter the market, it becomes easier to predict which securities will result in a return and a loss, based on which you make your next move.
Reading Charts and Recognizing Trends
Speaking of direction, when you look up stock market articles, often there will be images attached to a chart with fluctuations. It is true when traders say that a lot that has to do with trading involves reading graphs.
Trends of stock movement appear on a stock chart; these usually help create an accurate stock analysis, the direction it will move in, and where it will be in the future. Once you are confident in reading these patterns, it becomes easier to identify stocks you need to invest in.
Leverage
Leverage is essentially a financial investment strategy that allows you to borrow money to invest for higher future returns. In trading, you may borrow from your broker or a financial institution to invest in securities bigger than a trader’s account.
Leverage is necessary, and it functions as a loan; most traders do sign up for this but attaining leverage means adding risk to your account. Hence, it is essential to understand how leverage works to measure just how much profit you need to cover this risk.
Profitability and Risk Ratios
Courses you may have done in college for financial analysis include calculating ratios for debt, equity, profit, leverage, and more. To have a better grasp on trading, you will need to apply these ratios to get a rough estimate or percentage figure of your investments. These can include the price to earnings ratio, debt to equity ratio, and profit margin against the margin of risk.
Basic Mathematics
Even if you cannot perfect the areas above does not necessarily mean you will fail to trade. Some traders may not know the formulas for each ratio or the exact probability figure, given that stock trading or trading, in general, is an unpredictable situation. Nonetheless, what you do need is basic math.
Calculating moving averages, profit percentages, quick mental mathematics on your fingertips, and a rough analysis of figures are essential for trading. Do not stress too much if you have not gotten it nailed down yet because, for most, practice makes perfect.
Quant Trading
There exists a specific group of traders or a trading method that is built solely on mathematics. A quant trader (or a ‘quant’) develops a complex framework or an algorithm with the help of coding that helps institutions or themselves to day-trade efficiently and accurately by computerized decisions.
Predictions and forecasts are made. A criterion is built into the algorithm, allowing a computer to automatically buy and sell stocks for a trader without needing to stare at their screen for hours. This programming is done with math.
Quant traders build their own algorithms, so not only do they need to be good at programming but the instructions given to the system come from calculations they have made based on financial reports and trends they have studied. Algorithm trading also involves the added benefit of future analysis of risks and rewards.
Is Math All a Trader Needs?
Well, no. No matter how much it seems like it, the world does not revolve around math. A trader needs to have a skill set, not just a singular skill, to be successful.
- Analysis: a trader needs to be insightful. With a market that moves as fast as a stock exchange, a trader needs to make quick judgments and analyses based on trends appearing on charts. This is not only limited to data but an overall analysis of the industry and economy as well.
- Organized: trading can be messy, which means the trader needs a plan that maximizes rewards and minimizes risk. Creating a plan and sticking to it is another vital skill for a trader.
- Research: planning is based on research. While many traders enjoy impulse decisions and work on intuition, researching is essential. One cannot invest in a company’s stock without knowing how well they are doing or what their potential is. That knowledge comes from research and gathering information based on which choices are made.
The Role of Experience in Trading
Now that we have discussed skills let’s shed some light on the role of experience. While you need to have a diverse skillset that aids your trading acumen, there is no replacement for experience. That is why you should stop an assumed lack of skills from being the barrier to the start of your trading career.
Initially, start with trading small amounts and expand your experiential learning. As months and years pass, you’ll find yourself making better returns than most book-smart traders around you.
Ultimately, the answer to whether traders need to be good at math falls on the type of trading and the type of mathematics one is thinking about.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
You do not need to be good at trigonometry or linear algebra, but you need to understand math in its purest form. Subtraction, studying correlation, ratios, and probability will be a couple of concepts a trader should have a good grasp on to trade successfully.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
