Thursday, October 09, 2014

Fluid Reasoning and Making Decisions the Right Way

Adam Grimes' blog recently posted a worthwhile article from David Blair on the importance of decision-making in trading success.  A key point made by David was that success is less a function of "static" tools used to make decisions, such as charts or indicator patterns, and more a function of the quality of active decision-making.  Readers will recognize the difference drawn earlier between crystallized and fluid intelligence.  It is not so much what traders know as what they do with what they know that makes the difference.  

A good example came up in a question I was asked during my Benzinga interview yesterday about the NYSE TICK.  The interviewer asked if high and low levels could be interpreted as overbought and oversold levels that could be faded.  I cautioned against this, noting that, coming out of an overbought or oversold market, very low or very high TICK readings are often suggestive of a change in the tide of short-term sentiment and can lead to downside or upside momentum.  

Little did I know at the time that this is exactly what would happen in the wake of the Fed minutes release.  Up to that point, we saw a feeble bounce from an oversold condition and it appeared likely that we could eventually test the early August lows in the ES contract.  With the release of the dovish minutes, however, buying exploded and we saw NYSE TICK levels multiple standard deviations above average.  Indeed, multiple one-minute readings exceeded +1000.  Instead of being a level to fade, the high readings suggested that entirely new participants were jumping aboard the market, creating upside momentum that carried through to the end of the day.

Static reasoning tells us to fade the "overbought" TICK readings.  Fluid reasoning recognizes the context in which the extreme readings are occurring:  this is a short-term game-changer.  The ability to change gears and recognize new information and fresh upside participation in the marketplace is key to trading success.  Success is not so much a matter of making right decisions, as making decisions the right way:  fluidly, placing current observations into broader context.

Further Reading:  Honing Your Trading Process