Friday, July 20, 2007

Trading and Learning Styles

The medical student who came to my office for counseling was panicked. An important test was coming up the next day and she wasn't prepared. A bright, motivated student, she nonetheless had very poor reading skills. Every day she audiotaped the lectures from class and listened to them at home. Unfortunately, the professor announced that the test the next day would be taken from the textbook--and the book wasn't available in audio form.

She told me that she would fail for sure. What should she do?

Digging into my solution-focused playbook, I pointed out that this had no doubt happened before. After all, not all textbooks are available as audiobooks.

She nodded and explained that she went to college near her parents' home. When she couldn't get a book on tape, her parents read the chapters to her.

It made sense.

So, for the next couple of hours, I read the book to the student and she asked questions. She passed the test with flying colors and ended up graduating near the top of her class.

It was a dramatic example of learning styles in action. My student had a learning disability in the area of reading; visual processing was not her strength. But if she heard the information and had the opportunity to talk about it, she could comprehend and retain the material quite well.

Even those of us without formal disabilities have certain learning strengths and weaknesses. When I need directions to an unfamiliar location, I find maps only minimally helpful. I translate the map into a set of verbal instructions--"Right on Rt. 43, left at 34th St."--and then memorize those. Reading and writing the written word is my learning strength.

Educators describe four dominant learning styles:

* Visual
* Auditory
* Reading/Writing
* Kinesthetic

Together, these form the acronym VARK. Here's a quick, simple questionnaire to see where your learning style falls on the VARK dimensions.

Perhaps the different approaches to trading are mere reflections of the learning preferences and strengths of their proponents. Many technical analysis strategies--from chart reading to the CCI patterns championed by Woodie--rely on visual processing. The market maker at the investment bank who is constantly on the phone with customers--or the local standing in the pit assessing activity by crowd noise--is processing information through auditory channels. A market quant, researching ideas through financial publications and assembling data to test hypotheses, leans toward reading and writing.

But how about the kinesthetic learner? I recently had a humbling experience working with a kinesthetic trader.

Kinesthetic learners learn from direct, hands-on experience. My son Macrae would never think of reading a manual to assemble a new piece of electronic equipment. He looks it over, holds it, tries a few things out, and figures out how to put it together. He learns by trial and error. (He also assembles the item long before I've finished the manual!)

The kinesthetic trader I worked with came to me with issues of performance pressure. He was relying on setups that, I observed, depended on trending markets. He was profitable, but his win/loss ratio of trades was not especially high. I suggested a simple trend filter that would eliminate many of the losing trades. When he tried it, his stress level rose considerably.

What went wrong?

It turns out that he *needed* his losing trades. Not because he had a desire to lose, but because he--like Macrae--learned through trial and error. The losing trades gave him information about whether the market was trending or not. Feeling his way through the market early in the day with small trades gave him the information--and confidence--to place larger trades when his setups were present in a market that was moving.

Ironically, it was his attempts to improve his P/L by eliminating "bad" trades--a trap I also fell into--that was creating his performance pressure. He was working against his own learning style, and his anxiety was a warning sign that he was not playing to his strengths.

How many other traders are stressed out in trading because they're attempting to process information in ways that don't work for them? How many coaches fail to help traders because they offer information in one format and traders need to process it in another?

Traders are in the business of processing information. How much do you read? How much do you rely on charts? How much do you discuss ideas with others or get ideas from videos, TV, and other media? How much do tiptoe into the market, getting a feel for the action with small positions? Like my medical student, you're most likely to find your success if you stick to your strengths as a learner.


Trading and Information Processing: Why Traders Sabotage Themselves


Brandon Wilhite said...

Dr. Brett,

This isn't entirely in line with this post...(but not too far off topic)

I had a thought and a question this morning. You usually view trading through the lense of trading as a performance activity. Maybe a slightly different approach would be trading as a decision making process. In other words, traders are decision makers. So the question is whether or not there are certain qualities that make some people better decision makers than others? And also how can decision-making be enhanced?

I realize this has a lot of overlap with the topics of trading as performance and trader expertise, but maybe it's another facet worth looking at...

I'd really like to hear your thoughts on this.


x said...

Dr Brett,
This is on a comment you made on twitter. You mentioned about intermarket relation and how bond strength is tracking with stock market weakness. I'm not too clear about this though. I had thought that bond yield coming down is good for the equity market or not?


mOOm said...

Very interesting. I scored strongest on visual and zero on auditory. If people give me spoken travel directions I have no idea what they are talking about and usually will get lost. I just ask for the address and find it using a map. I scored about equal on the kinesthetic and reading/writing. I learn things by a mixture of trial and error and reading the instructions together. I write computer programs by just writing some lines and then debugging what happens.

peter said...

I was a +12 on the Kinesthetic scale.. Given my trading style, it fits.. I learn much more from doing than being told. And there have been more than a few learner trades I've done to see how they play out. Thankfully I've kept them small enough to not matter in the long run.

Same goes for my other passion, Photography. At most events I shoot (clubs, concerts, parties) I typically end up with a slew of bad photos at the beginning of a night before I find the groove that works. In fact, I'm very very nervous about a wedding I'm doing in Aug, as it's my first, and there's no time to ramp up while the bride is walking down the isle.


Brett Steenbarger, Ph.D. said...

Hi Brandon,

Thanks for the comment; it's a great point. Trading certainly is a decision-making process, which is why the behavioral finance/neurofinance research is so relevant. Could we help people become better decision makers by helping them rely on their cognitive strengths during periods of heightened perceived risk, uncertainty, frustration, etc? That would be fascinating--


Brett Steenbarger, Ph.D. said...

Hi Jordan,

When you have Treasury instruments rising and lower quality debt falling, it represents fear in the fixed income world--a kind of risk aversion that is associated with a withdrawal of capital from other assets perceived as risky (including equities).


Brett Steenbarger, Ph.D. said...

Hi mOOm,

Knowing oneself seems very important in this context. I'm not sure all traders have given much thought to how they process information and how their decision making processes draw upon their strengths. Thanks for the note--


Brett Steenbarger, Ph.D. said...

Hi Peter,

Great observations re: being a kinesthetic learner. A lot of trading education material is written for visual and verbal learners and is not very helpful to someone who learns through personal experience. It would be fascinating to tailor trading education to the learning strengths of traders.


Toon said...

I took the test and got this result:

Visual: 6
Aural: 5
Read/Write: 8
Kinesthetic: 7

Not strong at anything!

Brett Steenbarger, Ph.D. said...

Hi Toon,

Perhaps balance--and the ability to process information through multiple modalities--is itself a strength!


AnaTrader said...


I thought I was Kinesethic but I scored most ie 7 for Visual. Perhaps, I am both.

All teachers would do well to have their students tested with VARK questionnaires.

Hsieh hsieh ni.