Sunday, August 16, 2009

Horizontal and Vertical Knowledge and Trading Expertise

The number of aggregator and chat sites for traders on the Web has expanded greatly. Quite a few of them offer excellent content from good contributors. Too often, however, I leave these sites feeling like I've just eaten cotton candy: sweet and nice, but ultimately not sustaining or substantial.

Worse still, the commercial needs of aggregators lead them to ever more aggregation until the contributions become a cacophony. Add in a healthy dose of banner ads, heavy-handed promotional messages, and often-contentious reader commentary and you quickly hit overload, if not sheer incoherence.

In the academic world, where much writing occurs in professional journals, there is a tradition of continuity. One is expected to acknowledge past research and scholarship in an area and situate one's own thinking vis a vis past contributions. This creates a vertical dimension to professional dialogue: topics don't mushroom horizontally unless they also connect to past work and further knowledge cumulatively.

To be sure, academic discourse does not always execute on this model ideally, particularly in secondary journals. The ideal remains, however: review articles and review sections of research articles help to pull knowledge together, even as research topics multiply.

In the trading world, there are few examples of vertical integration. It is rare indeed for writers of blogs or articles to comment on each other's work, let alone advance their thinking in a cumulative fashion. Topics and articles mushroom horizontally--more commentators, more topics bring more eyeballs to the site for advertising dollars--but the crucial conceptual integration of the material is missing.

Hence the cotton candy feeling.

Expertise in knowledge-based fields is a function of coordinated horizontal and vertical thinking. A physician gathers a sizable amount of data from patients--via the history and physical, blood tests, and imaging studies--but those remain as isolated pieces of data until they are vertically integrated into possible diagnostic formulation. It's the pulling together of the horizontal that turns data into information.

Similarly, a work team will brainstorm ideas for improving sales. That horizontal process can lead to useful "aha!" experiences. It remains for vertical integration to pull together the best of the insights into a coherent plan for the business going forward. Without the vertical synthesis, brainstorming is merely a stimulating activity with little long-term impact.

Twitter is a great example of horizontal information dispersion. One person can generate dozens of observations and thoughts and many more can add their tweets to the conversation. But it is no conversation in the normal, social sense. No single topic is developed in any depth; rather, it is like the team's initial brainstorming. That can be extremely valuable--it is why I was an early adopter of Twitter in the first place--particularly as an alerting mechanism. But it has its limitations.

How does the tweet that links an article on weak consumer sentiment relate to a tweet on slowing market momentum? How do each of those relate to a tweet that describes profit targets or intermarket movements? The only way to connect the dots is to offer some kind of vertical scheme, akin to the physician's diagnostic system. But that cannot be achieved in 140 characters or even in a dedicated blog post. That is why review articles in the academic world tend to be lengthy: pulling together a great deal of information so that it makes sense requires a different kind of discourse.

The problem in the trading world is that there are few commercial incentives for detailed discourse. A single well-conceived article is probably more valuable than 100 superficial contributions, but it's the volume of contributions that will get the clicks, page views, and audience needed by advertisers. Hence, those sites that do attempt training and mentorship generally need to monetize their efforts by charging fees that are very high for developing traders. If a trader starting with a $25,000 stake spends $100/month on data and software and then another $100/month on "education", that's 10% pulled out of the account right out of the gate. Add commissions and other computer/internet related expenses and it's easy to see how the economic cards are stacked against the modestly funded beginner.

This is why I'm convinced that it's time to move beyond Twitter as a trading app for this blog, particularly for those interested in learning how to trade. There is always a need for the horizontal broadcasting of information, as heads up and trading alerts. Twitter is great for that, and I will continue to make use of it. But there is equal need to pull that information together in a coherent, vertical framework. And, if that is to be achieved affordably, that requires a different kind of platform and a different form of discourse. More to come...