Changing Minds and Markets: Quality Control in Trading

Suppose a person has demonstrated trading skills: an ability to read markets based upon lengthy exposure to live markets and internalization of trading patterns. What would cause such a trader to go into a prolonged slump?

One possibility is changing markets. If the patterns familiar to the trader change, then there is a need for a fresh learning curve. I see this very often when markets change their volatility, as has happened from the first quarter of the year to the second quarter (and as has been happening from day to day at times). Inability to adjust to changes in the market's tendency to follow through on moves creates losses (or missed opportunities), which then creates frustration, which then leads to further trading problems.

A second possibility is that changes in the trader's mind state result in variability in the sensitivity to market patterns. Though those patterns may be stable, the trader's frame of mind may vary from alert to bored to fatigued; mood may vary from positive to neutral to negative. Variation in concentration would lead to variation in ability to pick up patterns. Divided attention would create interference in one's feel for markets.

The challenge for traders in slumps is to differentiate between these two sources of trading problems. My sense is that too little thought goes into both alternatives: traders don't systematically look at markets over time and their changes, and they don't take time each day to standardize their mental and physical states. If traders were manufacturers, they would have poor quality control.

Of course, all this only makes sense for traders who have developed core skills and the ability to read patterns in markets. The majority of trading problems, I believe, come neither from changing markets nor changing minds, but the lack of time and effort devoted to systematic market learning. It's when those skills *have* developed that quality control becomes as important for traders as for car makers and restaurants. I'm not sure most traders know their quality or know how to improve it. That's something I'm thinking a lot about as I trek the Pacific Northwest this week.

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