vii
Preface
This book began several years ago as an attempt to provide a detailed road map for students
to follow from the theoretical quantitative finance taught in graduate school to building a
trading/investment system to manage real money in the real world. From our years of con-
sulting and experience in building funds and through academic research, discussions with
working students, and feedback from many colleagues, our perspective grew from writing
a classical money management book with detailed equations for calculating trading signals
and risk calculations to process engineering, statistical process control, Six Sigma, and soft-
ware design. The original shift back to industrial engineering was slow in the beginning, but
we kept going back to manufacturing examples to explain how to build trading/investment
systems. Every class, job, and consulting assignment led us away from the financial litera-
ture toward process engineering. Eventually, we both realized that the true missing theory
in finance was not another equation, but a concise methodology to implement theoretical
concepts.
At colleges and universities around the world and in most industry publications, the
mathematics of markets and trading is most often taught from a theoretical perspective
using clean sample data, in spite of the practical nature of the discipline as well as the
fact that most students are pursuing the knowledge for purely professional reasons. While
most academics prefer to teach students highly mathematical theory, working students
want to learn how to implement those theories in the real world and turn them into prof-
itable ideas and careers. While academics prefer to find and explain degrees of market
efficiency, working students hope one day to find and exploit inefficiencies. Students who
lack experience in the real-world financial markets study mathematics diligently only to
fail in interviews that ask for real-world knowledge. A gap exists between students of the
markets and the educational service providers.
Furthermore, students learn by doing. An ancient Chinese proverb states, “ I hear and I
forget, I see and I remember, I do and I understand. ” No class or homework assignment is
sufficient for one to become a good trading/investment system architect. Due to time con-
straints, students will not build their own components but rather buy off-the-shelf ones.
The value is in learning how to test components and glue the pieces together to build a
complete system. Does the school attempt to organize its curriculum around a process