Thursday, December 07, 2006

Gurdjieff, Turtles, and Trading

"The highest that a man can attain is to be able to do."
G. I. Gurdjieff

Most posts about trading, mine included, are about doing: what to do, what not to do. This is a post about how to do. This is an important post.

In Vonnegut's book Cat's Cradle, there is a religion called Bokononism. It is a collection of lies ("foma") that make life on the dreary island of San Lorenzo more palatable. Among other things, Cat's Cradle is a book about the role of lies in human life.

Philosopher and mystic G. I. Gurdjieff also emphasized the role of lies in human psychology. The greatest of lies that we tell ourselves, Gurdjieff asserted, was that we have free will. In reality, most of our actions are mechanical, tossed here and there by moods, whims, needs, and the impact of external events.

Of course, it is painful to face the fact that we lack control over our own lives. So we create our own personal Bokononisms. We take solace in New Year's resolutions and earnest plans for self-improvement that, like last year's exercise equipment, eventually become part of our forgotten mental furniture.

Psychologists would never exist if people had free will. Those with problems would read self-improvement books, take good advice, and end their problems straightaway. But, no; that's not how human psychology works. We can know what to do and we still don't do it. We know we're supposed to eat healthy foods; we know we should always be appreciative of our spouses; we should exercise, not overspend our savings accounts; and we should cut our losing trades.

Quite simply, people lack intentionality: the ability to sustain directed activity. They cannot do.

Gurdjieff's insight was that we lack intentionality because we fail to remember ourselves. In a state of self-awareness, we vow to do the right things. Once we exit that self-awareness, the right things vanish with it.

Zen masters spend years cultivating the capacity to remember themselves: to remain self-aware. They realize that free will begins with the ability to sustain a single thought--and only that thought. Sit quietly in a dark, silent room and make the effort to focus all your attention on a mental image of an empty vessel. See how long you can sustain the image without your attention drifting to random thoughts and images. Before long, you forget the vessel altogether...

So what does this have to do with trading?

In 1983, Richard Dennis and Bill Eckhardt sought to resolve their dispute over whether trading success could be taught or whether it is inborn. They tested a trading system, to be known as the Turtle Trading System, and taught it to their group of novice traders.

Legend has it that the Turtles went on to become wildly successful traders. But, of course, like much of history, that is a pack of foma.

The Turtles varied significantly in their trading performance. Some followed the rules Faithfully and made significant money. Others did not and could not follow the rules and were dropouts from the experiment. Intentionality, not the system rules (which were the same for all traders), predicted trading success.

And now I will give away the secret of the Turtle Trading System and why it so effectively illustrates Gurdjieff's insights:

The Turtle Trading System is a system for losing money.

It makes losing money scientific and details precisely how it should be done.

Most traders want lies: how to make money easily, without the constraint of rules or the demands of research. They do not want an education in how to lose money, because they do not want to lose money.

And that is why they never make money.

The precise rules for the System are readily available and there is even software that will tweak the rules and identify the most promising markets to trade. According to Alexa, less than 4 people in a million will visit those pages. And, let's be generous and say that 10% of those visitors make the effort of downloading the rules and 10% of them can actually follow the rules to learn how to lose money.

That leaves us with very few people.

Gurdjieff taught, "If we do what we like doing, we are immediately rewarded by the pleasure of doing it. If we do what we don’t like doing the reward must come later. It is a mathematical law and all life is mathematics."

Not many people like learning how to lose.

Losing money with intentionality: that's a useful secret of the Turtle Trading System, even for those who aren't Turtle System traders.