Sunday, March 22, 2015

Best Practices in Trading: Maximizing Your Information Processing

The typical trader works from multiple screens and each of the screens carries multiple pieces of information updated in real time.  Some screens update charts; some update news; some are for messaging; some track quotes across many markets.  No trader wants to miss a fast-breaking development, so the temptation is to add screens and add more data to each screen.  Can traders really process all that information in real time?  How much of what appears on our screens truly is information--and how much is distraction?

Today's best practice comes from Terry Liberman from WindoTrader.  He emphasizes the importance of understanding and owning your trading information processing system.  Years of experience in developing effective trading platforms have taught Terry quite a bit about how traders process information.  His key point is that we cannot maximize our processing of market information unless we understand our information processing strengths and play to those.  One of the unusual features of WindoTrader is the ability to overlay information displays on one another, so that the trader can visualize price action on several time frames simultaneously.  For a highly visual information processor, this can provide a significant cognitive efficiency.

As Terry points out, the best practice of streamlining information to fit your processing style is increasingly important, given the explosion of data available to traders:

"As we know, there is no shortage of information because this is the Era of Information Overload on Steroids.  The important thing for those of us who trade is to be able to quickly and easily find the information that meets our requirements as to relevance, usefulness, applicability, and fit.  

One way to think about information processing is to recognize that data are not information and must first be converted into information through your filters of relevance, importance, and applicability.  Once they become information and meet your criteria as information, you now have knowledge and some understanding of it so you can make some decisions about it.  And then, once it meets your requirements, decide how you're going to act on it in alignment with your performance criteria.

To increase your ability to collect the information your require and process it, begin with the information you need, why you need it, and the benefit it will specifically provide you at this moment in time.  Next, determine both the context and the content of the information as well as its validity overall and its validity for you.  And finally, plan the specifics for using it and gaining the most from it in your pursuit of achieving your goal or goals.  To read something fun as well as thought provoking, check out Information Anxiety."

Terry makes a very important point:  trading is, at root, a cognitive process.  It is all about taking in data, assembling data into information and insight, and making decisions based upon the ongoing streams of information and insight.  How much of what is on our screens is truly essential to our decision making?  How many screens would we employ and how cluttered would each screen be if we only focused on the data most relevant to our trading decisions?

Streamlining our information processing forces us to think about our thinking and follow our chains of reasoning in generating sound trading decisions.  Terry's best practice is not just optimizing our screens; it's optimizing our thought processes and then adapting our screens to the best of our processing.  More is not better; many times it's fast information processing that is as important to trading as deep information processing.  By carefully organizing what is on our screens and how it is displayed, we can improve the efficiency as well as the effectiveness of our thought processes.

Further Reading:  What Trading Teaches Us About Life