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