Friday, December 05, 2014

A Creative Cure for Overtrading

The world would be a far less beautiful place without the artistry of creativity.  If there's one relationship I've seen over the years as a psychologist, it's that fresh viewing leads to fresh doing:  When we see life's challenges through new lenses, it opens the doors to new actions, novel solutions.  Sticking with one mode of thought is a great way to stay stuck in any action pattern.

This morning I was up at my usual 4 AM time, aided by the hungry cats that serve as my daily alarm bell.  Seemingly out of nowhere I posed a question to myself:  Suppose we were to measure, every few minutes during the day, how many stocks in the broad market were trading above and below their day's volume-weighted average price.  And suppose we were to keep a running, cumulative total of that number.  Would that create an effective diffusion index assessing market strength and weakness?

So, after feeding the cats, I went back in time, pulled the data, and assembled the spreadsheets.  What I saw looked promising as a first approximation.  I now have my homework for the day to refine this measure and put it to some challenging tests.

If history prevails, the new measure will either overlap old ones--or merely overlap contemporaneous price movement--so that it adds little fresh information to the analytical arsenal.  As I've mentioned earlier, however, my strategy is to generate at least one such fresh idea per week.  If ten percent of those prove unique and useful, I will have added meaningfully to my understanding of markets over the course of the year.  The compounding effect over several years is particularly significant.

But there is another, deeper benefit to this work:  When you are generating new ideas and stimulating yourself with fresh perspectives, there is no need to seek stimulation in (over)trading.  If your mind craves activity, you will keep yourself active--even if that activity is not constructive.  The answer to overtrading is not to discipline yourself to be less active, but rather to channel activity in creative and constructive directions.

Nietzsche observed, "Under peaceful conditions, a warlike man sets upon himself."  When markets are quiet, that is when we can work on ourselves.  That is when we can generate and test ideas.  Much of long-term success comes, not just from trading, but from what we're doing when there are no sound trades to place.

Further Reading:
Cultivating Emotional Creativity
Conflict and Creativity in Trading Performance