Monday, November 24, 2008

A Trading Performance Insight From Ziad Masri

Dear Readers,

I thought this email from reader and commenter Ziad Masri was so insightful, that I asked for his permission to share with others. His key observation, that it's not how long you trade, but how many patterns you observe and act upon, that determines the learning curve helps explain how active traders can develop expertise in far less time than is commonly observed in other performance fields.

Notice also the emotional tone of Ziad's communication. To sustain enthusiasm and learning during the most challenging markets is a real accomplishment. Without that drive, the learning curve stalls out. Many people love trading and love making money. Not so many like the things you have to do to learn markets and make good trades.

Brett


Just thought I'd write and share an observation with you. A trader friend of mine and I were talking recently and it occurred to us that the recent market environment not only is giving incredible opportunities for some large profits, but it is also giving incredible opportunities for accelerated learning. With volatility running at all time highs, what used to take 2 weeks to transpire is now taking one day (like you alluded to in your ATR study). As such, and with the abundance of trends that we're seeing, there are literally hundreds of more patterns appearing in a given time-frame than we used to see before. I remember early last year I'd sit there and watch the market for hours as it moved in a 6 point range with nothing happening. Now it's almost non-stop action. The effect of all this extra exposure has been accelerated learning.

This was all brought home to me when I noticed starting a couple of months ago that my trading skills seemed to make an instant leap. I was suddenly seeing the market differently and being able to sense moves to a much better degree. I couldn't understand the reason for this, but now I see it was the result of accelerated learning given the market conditions of late. Quite literally, it's as if I just got 2 years of added experience compressed within 2 months. Realizing this has not only been interesting, but it has also benefited me indirectly because I was starting to doubt how my results could be so good. I was thinking this is too good to be true for it to be happening so fast (which can be a form of self-sabotage), but now I realize that the length of time I've been trading can be deceiving as it's not the length of time itself that determines learning but how much exposure we have to patterns during that time. And from that point of view, there's never been a better time to learn and grow as a day trader... this market, far from just offering ample opportunity, is offering a crash graduate course. And I'm happy to be enrolled!
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11 comments:

E-Mini Player said...

Excellent point! This is a great environment to learn in, and I think traders who can survive this volatile market will experience easier times ahead.

SSK said...

Hello Ziad! I agree with you, a wonderful time for learing! Keep up the good work! SSK

Dhiren said...

Does Ziad Masri have a blog?

Thanks

Ziad said...

Thanks Dr. Brett for the post.

And I should mention that the trader friend I was talking with was none other than SSK :)

As for the blog Dhiren, I'm afraid I don't have one. I find sustained writing of true quality to be an incredibly challenging task, and I'd much rather leave it to those with the talent and inclination to do so. In fact, I commend them for their ability to both blog and trade. For me, I'll stick with the trading ;)

Ziad

Jesse said...

I agree to a certain extent, however, it also seems to me that the increased emotionality of the markets also makes them much easier to read. Moves seem to be far more predicatible as a whole when there is a lot of fear and greed involved, and that has certainly been the case over the past year. While a lot more has happened, and that does accelerate the learning curve, I would caution against expecting the outsized P&L gains of the past year to continue once the volatility dies down and we settle into the doldrums of recession

twostep said...

I would say this is good for learning if you already have a little bit of time under your belt. I don't believe this is the time for someone brand new to jump in and take a shot. As a new person, you need the extra time to find the patterns and charts and place your entry exits accordingly. Asking them to do this on the fly is asking for trouble. If someone takes the time to sensibly figure out an entry, stop and exit, the pattern has already finished and the person is either chasing the stock higher or missing it all together.

Krasimir said...

I agree that current market conditions offer ample opportunity for faster learning by more frequent exposure to patterns. It’s been confirmed by other day traders too. What I am not quite sure about is the structure of the learned patterns under different market conditions. It might be true that as fast as we learn trading under those conditions we might need to unlearn as fast as possible that style of trading when market conditions start to change and re-learn the old (or new) trading under less volatile markets. I’m not talking about the general trading skills that persist over different market conditions (and that might enhance during current conditions due to more frequent repetition), what I am talking about is that our reactions are domain specific and as market changes we need to adapt respectively.

Ziad said...

You guys have made good general comments and valid points.

To address a couple of issues:

Obviously, to a brand new trader this market environment will be a blur. But in essence no new trader should just "jump in and take a shot" anyways. They at least should start out on a simulator, and maybe even just observe the action at first without attempting to trade it.

As for not expecting the outsized P&L's to continue, I definitely agree with that. This level of volatility just can't be sustained. However, based on my own personal subjective study of historical volatility, I don't think we're going to return to the pre-crisis low volatility era. It seems to me that volatility has large cycles running several years long, and once large volatility has been awakened and sustained a while, it tends to bring in a new era which lasts at least a couple of years. We all know this crisis isn't going to blow over right away, and thus I think it is reasonable to expect a generally more volatile environment in the coming years (not as elevated as recent weeks, but still larger ATR's than in the bull market doldrums).

Given this, and with regard to the last comment, I don't think newly learned patterns are going to become suddenly obsolete. Yes, we'll always need to adapt and unlearn some things, but I think there is a good skill set to be learned in these times that will serve us well for the next couple of years ahead- albeit intermittently as volatility waxes and wanes (even within a generally elevated volatility era).

In the end my view is that while the late 90's was the golden era for amateur day traders, as it required little skill to make money, I think we are potentially in the beginning of a golden era of day trading for professionals. I can only hope I'm right!

Ziad

james said...

i agree completely. The creative juices have been in overdrive. It seems like everyday there is a new pattern to test.

Krasimir said...

Hi Ziad,
I didn’t mean to be critical on your comment. I also share your opinion that current market volatility might persist for longer run and give us wonderful opportunity to exploit newly learned patterns. Actually, every experienced trader has been in such a transition period as volatility started to pick up. My point was made to perhaps less experienced traders that haven’t been exposed to different market conditions and might think and be confused that patterns (and some associated trading skills) under one type of volatility would work to other type too. Also, I would like to emphasize again that there are universal set of trading skills that are essential whatever the market conditions are. To be more specific, skills like trade management (management of winning trades, management of losing trades, where to place targets or exits, BE, hard stop loss, entry zone, etc.), position sizing are a must. But also, there are trading skills that need to be (re)learned when conditions change, such as knowing when to trade and when not to trade under given market type for the day, etc.
I enjoyed the comments of this post. They are valuable for traders. Thanks.

Brett Steenbarger, Ph.D. said...

Thanks for the excellent comments and thanks again to Ziad for his insightful views--

Brett