Friday, December 09, 2016

Two Modes of Trading: What Kind of Trader Are You?

I've found that there are two modes of trading.  One mode is going into sessions with the answers you've researched.  You've investigated information that is predictive and you look to enter positions that exploit those predictions.  The second mode of trading is to go into sessions with questions.  You view the market as an auction process and you look to see how the auction is setting up: whether buyers or sellers are dominating.

The first kind of trader is like a musician who has studied a piece of music, interpreted it, practiced it, and now is performing the piece at a recital.  The second kind of trader practices all sorts of music and then comes to the recital prepared to improvise based upon what the other musicians are playing.  Think about standard tournament chess and think about speed chess.  If you only have a limited amount of time to make all your moves in a game, you spend your time in real-time pattern recognition, not deep strategy.  

In the most widely read blog piece I've written, I sketched out the three questions most important to understanding markets.  That's relevant to trading like a speed chess player.  In the posts from yesterday and the day before, I identified ways of looking at market strength and weakness that can help anticipate future market direction.  That's relevant to developing answers and trading a particular edge or set of probabilities.

Imagine a chess player who switches between standard tournament chess mode, carefully analyzing the board and planning moves, to speed chess mode, quickly responding to the pattern of movement on the board.  Such a player would probably engage both modes poorly.  The speed mode would interfere with executing the strategy and the strategizing would interfere with the feel needed for pattern recognition.

My hypothesis is that don't necessarily fail because of emotional issues, and they don't necessarily fail because they lack information or experience.  They fail for epistemological reasons.  They vacillate in their approaches to markets and never fully exploit any.  They play too many games and so never become truly proficient at any one.  Successful traders trade the way they're wired, and that requires the self-awareness to know how you're wired and the self-acceptance to ground yourself in that.

Further Reading:  Trading and Information Processing