Modeling – forecasting the future doesn’t necessarily mean practical benefits

In order to keep the discussion consistent, we need to draw a thin but solid line between trading and modeling. Sometimes, these two terms are seriously confused and may lead not only to misunderstanding but also to losing money.

Modeling is a research activity that aims at building a model that explains the observed data. For example, Ptolemy developed a geocentric model of the Solar System, whereas Nicolaus Copernicus suggested a model of the Earth spinning around its own axis and traveling around the Sun on an elliptical orbit – now known as the heliocentric model. Both models explain the observed data: that the Sun visually moves around the Earth, that day follows night, and that seasons change in order. However, the heliocentric model proved to be far more precise and easy to use, so the other one was abandoned.

In the financial world, modeling a market means finding a set...