Saturday, September 26, 2015

There Is No New Doing Without New Viewing

One of the most common mistakes traders make is that they want to do new things--find fresh opportunities, change the way they manage trades or themselves--while retaining their existing ways of seeing the world.  If we look at the world through the same lenses, we'll pretty much see the same things and respond in the usual ways.  New doing requires fresh viewing--the ability to wear a different set of lenses.

I was pleased to see that my new book, Trading Psychology 2.0, is finally available.  I gave the book that name to convey an important theme:  recent research in psychology has moved us a long way in recent years, challenging our traditional ways of thinking about the psychology of trading.  In other words, recent work in psychology provides a new set of lenses that allows us to view our trading--and our growth as traders--in a fresh light.

Margie and I recently spent an evening and morning in Tusayan, AZ, just outside the Grand Canyon.  We visited the Canyon around sunset and then again around sunrise (see above).  The light on the rocks and canyon was completely different at the two times.  What you saw in the evening--the textures, colors, and details--was radically altered in the morning light.  It was like viewing two master paintings of the same subject.

Notice how the process of visiting the Canyon at sunrise and sunset is very different from the tourist's process of coming to the site at a random time of day, taking a look at the big canyon, snapping a few pictures, and then going on for the rest of their trip.  

Most traders approach markets the way the average tourist visits the Grand Canyon.

What the new psychology teaches us is ways of seeing markets at sunrise and sunset--in one light, and then a very different light.  That is how we arrive at fresh insights; that is how we see things that others miss.

One set of charts that I keep examines price levels--and rates of changes of those levels--at different time intervals.  Another set of charts I keep examines volatility readings--and changes in those--at different time intervals.  One set of price and volatility charts is denominated in price change units--each "bar" represents a given amount of movement in the asset, not a fixed time period.  Another set of price and volatility charts is denominated in volume units, where each "bar" is drawn after a fixed amount of contracts trade.

The opportunities exist at the intersection of those four sets of charts, where price change and volatility patterns line up.  If I view markets as a tourist, looking solely at time-based price charts, I never see the intersections.  The tourist who comes to the Canyon at noon never sees the Canyon at sunrise or sunset--and can never appreciate the changes between the two.  The tourist who looks at markets one way cannot see the opportunities that spring from a fresh set of perspectives.

An important takeaway from Trading Psychology 2.0 is that we can't master markets while we're stuck in our own 1.0 version of trading psychology.  Only by viewing ourselves and markets in new ways can we set ourselves up to do new things.  There is no edge in consensus perception.

Further Reading:  The Most Important Trading Trait