The leap from completely uncertain decisions to risk-based decisions

In order to explore the connection between systematic trading methods and risk-based decision-making, it is helpful to review the relevant concepts in decision analysis.

First, the relevant concepts of decision analysis

Decision analysis is a branch of operations research and an applied mathematics discipline, which aims to provide logical and systematic analysis methods for various decision-making problems.

The definition given by the author is: Decision-making is the process by which an individual or organization makes a choice among multiple action plans in order to achieve a set goal based on objective existence, subjective experience, common sense and logic, and with the help of corresponding tools, methods and techniques. In this process, decision makers need toRaise one's headFace up to all possible outcomes.

Decision-making has the following characteristics:

1. Future nature.

2. Selectivity;

3. Targeting;

4. Practical.

The decision-making process has the following elements:

1. The decision-making body;

2. Decision-making objectives;

3. Action plan;

4. Decision-making environment.

Decision-making problems have existed since ancient times, and with the continuous progress of society and science and technology, decision-making problems have become increasingly complex. Faced with an increasingly complex decision-making environment, people need to hold their heads high to meet the challenges brought by uncertainty. According to the different nature of future events, decision-making problems can be divided into three types: deterministic decision-making, risk-based decision-making and completely uncertain decision-making:

1. Deterministic decision-making

The so-called deterministic decision refers to the decision that all future events related to the action plan are deterministic and non-random before the decision is made.

2. Total uncertainty decision-making

Completely uncertain decision-making refers to a decision in which all future events related to a course of action before the decision are uncertain and random, and their probability distribution cannot be predicted.

3. Risk-based decision-making

Risk-based decision-making is a decision in which future events related to action plans are uncertain and random, but their probability distribution can be known.

Sometimes we also refer to completely uncertain decisions and risk-based decisions as non-deterministic decisions.

Forex trading decisions are typically non-deterministic decisions. In other words, they are either completely uncertain or risky. Traders need to face this reality head-on in order to stay awake in trading.

II. Definition of systematic trading methods

As for the definition of systematic trading method, there is no unified standard at present. The author believes that systematic trading method refers to a systematic trading method formed by traders who use the trading system to handle information collection, information processing, trading decision-making, trading planning, trading execution and other links.

III. The systematic trading approach is a risk-based decision

Systematic trading method is characterized by pure technical analysis, objectivity, quantification, mechanization, procedure, institutionalization of fund management, institutionalization of risk control, systematization and consistency.

After adopting the systematic trading method, trading decision-making activities will be systematic and consistent, which is of fundamental significance for traders to achieve long-term stable profits. If traders use the systematic trading method to make decisions, then each trading order issued by the system has a relatively stable probability of winning and expected return. Although the trading system cannot guarantee that every order will be profitable, traders can clarify the probability distribution of the interest rate for each order, which makes the decision-making behavior guided by the systematic trading method step into the category of risk-based decision-making.

The task of determining the probability distribution of the interest rate of the trading order has been completed through historical data testing long before the trading system was officially put into practice.

In contrast to systematic trading methods, non-systematic trading methods are often completely uncertain decisions. Ordinary retail investors often use such methods, so their trading decisions are often in a state of complete uncertainty.

The evolution of traders from unsystematic trading methods to systematic trading methods is essentially a leap from completely uncertain decision-making to risk-based decision-making.

IV. Conclusion

Systematic trading is essentially a kind of risk-based decision-making. This kind of decision-making model is conducive to traders using modern portfolio theory and methods to implement multiple types of diversified investments, thereby reducing the overall operational risk of systematic trading, which is particularly beneficial to traders with small capital scale.