Wednesday, August 27, 2008

Implicit Learning and the Unattached Mind

In my books, I've described pattern recognition as fundamental to trading, with patterns learned through a process of implicit learning. Implicit learning occurs when we are exposed to multiple examples of patterns and thus become sensitive to the rules or regularities behind those patterns. This process is implicit in that it occurs without conscious calculation. For example, young children can speak in grammatical constructions--having heard so many sentence patterns over time--but they cannot verbalize the rules of proper grammar. Similarly, we know how to act and react in social situations, having experienced them so often, but could never formulate enough rules to capture our sensitivities to other people.

When traders see enough examples of supply and demand, they develop a "feel" for markets that is the result of implicit learning. Invariably, the very short-term traders (scalpers) I have worked with cannot verbalize their rules for entries and exits. They react to what they see, having seen those patterns play out thousands of times in the past.

This is why many experienced daytraders will encourage beginners to not think too much about markets. It's not just anti-intellectualism; they realize that explicit thought can interfere with access to implicitly encoded patterns.

When traders personalize their trading--when they attach their self-esteem to their results--they lose this access to implicit awareness. At those times, it's no longer about market patterns; it's about the trader. Bad trading is not necessarily emotional trading; after all, it's a kind of feeling that alerts traders to what they know. Rather, bad trading begins with attachments: to one's ideas, to trading results, to reputation, or to just being right. Once we are attached to what markets can bring us, we're no longer receptive to what we know implicitly. At that point, we are not mindful of patterns; we're mindlessly reacting to our own needs and desires.

This is where much self-help, coaching advice about trading has it all wrong. It's not about thinking more positively about yourself; it's about removing the self from pure performance skill. We cannot access what we know implicitly when we are locked into mindless patterns of explicit thought. To stay unattached to the outcomes of our actions when we are surrounded by vast risk and reward: this is why trading is such a vexing--and noble--challenge.
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7 comments:

Mark Wolfinger said...

"To stay unattached to the outcomes of our actions when we are surrounded by vast risk and reward: this is why trading is such a vexing--and noble--challenge"

Brett,

This single sentence is a superb summary of why so many traders fail.


"Surrounded by vast risk and reward..."

The potential to make a killing or get wiped out - that's quite an emotional challenge to be able to set that aside. Few can.

Bev & Mike said...

Brett, you've posted several times about cumulative tick index. Where can I get information or daily charts on the index?

Aman Mehari said...

Hi, Brett

An excellent post.

“It's not about thinking more positively about yourself; it's about removing the self from pure performance skill.”

I’m a long term trader but my experience may have some relevance. Personally as a beginner, in order to remove the self from the action and maintain emotional consistency, I started by clearly and “explicitly” defining simple market truths, such as “the trend is your friend.” I investigated the truthfulness of that statement by doing thousands and thousands of historical back tests and real time market observations until I was thoroughly satisfied. These early simple explicit definitions helped me build the mental structure, or mental framework, where by later my “implicit” learning took over. In my experience, defining and testing your approach is a huge part of the game. Implicit learning naturally follows from practice and continual drilling of the basics. Just my $0.02.

Cheers,
Aman

Project Night Sky said...

As a newbie, speaking from my own experience. I find it helpful to "hide" the actual dollars earned in the trading platform.

So I have no idea how much I made in dollar amounts. But I keep track of my RnR using pip values

This keeps the focus on money management and RnR.

I dont think stock traders have this luxury tho...

Great post as usual Dr Brett

The blogger said...

Dr. Brett:
You're a Buddhist.

"no self" "unattached"

May I recommend As It Is by Dzogchen master Tulku Urgyen Rinpoche.

My best regards,
John Navin

Trader Kevin said...

"Invariably, the very short-term traders (scalpers) I have worked with cannot verbalize their rules for entries and exits. They react to what they see, having seen those patterns play out thousands of times in the past."

Mark, this dovetails with my experience as a pit trader. If someone asked, "Why did you make that trade?" it might take me ten minutes to explain all the factors that went into a decision that took me a fraction of a second to make.

You're not thinking, you're reacting, but that comes from thinking about the markets pretty much 24/7. (I used to dream in markets constantly when I was a pit trader, less so now that my time frame is 0-5 days and I sometimes go days without a trade or position.)

I can't tell you the number of times I'll be deep in thought and my wife will ask, "What are you pondering?" I reply, "Same thing as always, I'm thinking about the stock market."

Anuj said...

Excellent..thank you Brett for posting a masterpiece.

This is the real secret of trading- Implicit Learning. It comes with time and daily practice.